Student loan repayment regime 'to get tougher' – but the good news is fees might be frozen at £9,000

The head of higher education’s most influential think-tank warns steps must be taken to avoid another financial crisis

MPs have called for an urgent review of the student loan system (Getty Images)

Students face a tougher loan repayments regime to avoid a financial crisis over unpaid debts, the head of higher education’s most influential think-tank has warned.

Nick Hillman, director of the Higher Education Policy Institute said: “Without stricter repayment terms, there could be cuts to other key departmental programmes - such as apprenticeships or science.”

He was speaking at the publication of a report by HEPI warning ministers will have to decide whether to lower or freeze the threshold which triggers loan repayments from its current level of £21,000 a year and/or abolish the 30-year cut-off period after which debts are written off.

In addition the cost of a university course could be frozen at £9,000 a year to avoid the need to pay out higher loans to students from scarce public funds.

The dilemma, says the report, emerges as a result of the Department for Business, Innovation and Skills being told it now has to recover part of the increases in loan defaults from within its own budget. Experts have warned that 45 per cent of debt could be unpaid by 2045. The Treasury, however, denied this would have a “significant” impact on BIS’ spending.

It will be a top priority for new Universities Secretary Jo Johnson to tackle - but he will have to tread a tightrope as Treasury officials will be anxious to avoid spending more on student loan while many university vice-chancellors will be anxious to increase fees above their present level of £9,000 a year as costs rise.

Figures cited in the report show the gap between new loans being issued and repayments rising from £9.8 billion in 2014/15 to £13.9 billion in 2019/29. (Shutterstock)

Labour will argue that the dilemma over unpaid loans puts their election policy of lowering fees to £6,000 a year in a more plausible light - as it will cut spending on loans.

Sally Hunt, general secretary of the University and College Union, said: “The Government’s enthusiasm to create a market in higher education, while hiding the true impact on students and government debt, has led to an out of control accounting nightmare which is simply not sustainable.

“Our fear is that unless the system is completely overhauled there will be inevitable pressure higher fees and/or higher repayment rates. A new government is a good time to properly revisit the issue of student finance and develop a system that is fairer to students and safer for our universities.”

Andrew McGettigan, author of the report, argues the sustainability of the current system will have to be questioned almost immediately.

“The new accounting conventions provide a risk-sharing agreement between the Treasury and BIS which requires BIS to increase projected loan repayments or face year-on-year cuts to other spending,” he said.

“This new risk-sharing agreement may incentivise BIS to change student loan repayment terms. That could undermine public goodwill towards higher education and bring more fundamental questions about sustainability to the fore.”

Figures cited in the report show the gap between new loans and repayments rising from £9.8 billion in 2014/15 to £13.9 billion in 2019/29. It bottoms out at £8 billion a year by 2040. Of the measures that could be taken, Mr McGettigan says: “For example, the maximum tuition fee could be frozen at £9,000 as it has been since it was introduced in 2012. Or the interest rate, repayment rate, repayment threshold and write-off period could be amended.

“The clearest candidate is freezing the repayment threshold which the Coalition committed to increase in line with earnings after 2016."

He says the Treasury settlement “is pushing policymakers towards certain solutions which may not be in the general interest of universities and colleges or students”.

“While policymakers might come to argue student loan repayment terms can be altered just as easily as income tax rates, others already argue that changing the repayment terms of a contractual loan for existing borrowers is morally indefensible.”

BIS declined to comment on the report. A spokesman said the Treasury said its arrangement with BIS would “share any additional costs of student loans over a 30-year period”. “This will enable BIS to afford any additional costs that may arise without having a significant impact on other parts of its budget,” he added.