Should we follow the Kiwis and offer discounts for graduates who pay off their student loans early?

Anyone hoping to get a university place this year is likely to be feeling anxious. With a record number of applicants and universities facing funding cuts, demand is far outweighing supply. At last year's party conference, the shadow universities spokesman David Willetts outlined the Conservative's plan to fund an extra 10,000 places by offering those with student loans a discount if they repaid their debt early.

As the general election looms and the funding crisis deepens, the proposal has come under closer scrutiny. University of Worcester vice-chancellor David Green argues that with savings rates so low, many graduates would make repaying their loans a priority if they were given discounts. However, both the university think-tank Million+ and the National Union of Students have questioned the costings, while the higher education minister David Lammy has described it as "fatuous" in the House of Commons.

The Tories say the policy would encourage early repayments to the tune of 1 per cent of the entire £30bn student loan book bringing in £300m, which they say is enough to fund 10,000 students for three years.

But there are concerns about the estimates. "We've got this thumb-in-the-air figure of 1 per cent of the loan book being repaid but we haven't seen any modelling from the Conservatives," says NUS president Wes Streeting. New Zealand introduced an early repayment discount last April with a similar target and Australia has had a discount since 1996. Both countries offer 10 per cent on any voluntary repayment over $500.

As New Zealand's discount was introduced during the current financial year, no figures are yet available on take-up. However, statistics from the Australian Tax Office – which collects repayments for Australia's Higher Education Loan Programme – are promising. Between 1989 and 2007, 17.8 per cent of the 2.1 million individuals incurring a debt made a voluntary repayment. Of the A$19.5bn (£12bn) of debt incurred during that period, A$1.4bn was repaid voluntarily. A report from Australia's former Department of Education, Science and Training showed that voluntary repayments rose after the discount was introduced and on a year-to-year basis totalled 1 per cent of the total debt accumulated from 1996 to 2004.

Kate Naughtin, a teacher from Victoria, is among those who made an early repayment. "In my first year of university I paid back some of my HECS [Higher Education Contribution Scheme] and received a discount. I had a bit of extra cash due to my grandma passing away and wanted to use it wisely," says the 26-year-old. "My brother also recently paid back all his university fees because he didn't want it over his head."

One reason take-up is perhaps not even higher in Australia is because a much bigger discount is available to those who pay up front. This discount is currently 20 per cent, but was previously 25 per cent.

Megan Bailey, a 26-year-old teacher from Queensland, chose this option. "I paid the fees every semester as I trained because the discount was 25 per cent. I paid them myself as I had a part-time job."

The university lobby group Million+ says even if the discount raises the necessary funds, it would benefit wealthier students and might encourage those who would normally pay their tuition fees up front to take out loans.

"This scheme would reduce the contributions made by wealthier students and graduates and would obviously benefit those who can afford to pay fees up front or pay off their student loans early," says chief executive Pam Tatlow. "In England, 20 per cent of full-time students do not access the loan scheme so this proposal runs a real risk of reducing the cost of higher education to those who are most able to pay,"

Willetts, however, says criticisms of elitism are ignoring the bigger picture. "People who say it only benefits the wealthy are looking at it from the wrong end," he says. "The beneficiaries are young people who want to go to university and we know that many of the extra people applying are from black and minority ethnic backgrounds and families where they are the first to go to university – they will benefit from the extra places."

Bruce Chapman, professor of public policy at the Australian National University and the brains behind Australia's funding system, says those on lower incomes are often better off not making early repayments, even taking the discount into consideration. "A lot of people say it's really unfair because the rich people get a discount. For most people, getting the discount is not a good idea because they are forgoing the interest rate subsidy of a loan that is interest free, but that is a difficult point to get across. You could never get a loan from a bank at these rates, so those who take longer to pay it off are benefiting for longer."

Over time, higher income earners who repay their loans earlier are often no better or worse off, but the discount can be a useful tool in encouraging people to repay more quickly and therefore increasing governments' cash flows, says Chapman.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Education

Imperial College London: Safety Training Administrator

£25,880 – £28,610 per annum: Imperial College London: Imperial College London ...

University College London: Client Platform Support Officer

£26,976 - £31,614 per annum: University College London: UCL Information Servic...

Guru Careers: Instructional Designer / e-Learning Designer

£30 - 32k (DOE): Guru Careers: We are seeking an Instructional / e-Learning De...

Recruitment Genius: Schools Education & Careers Executive

£30500 per annum: Recruitment Genius: A Schools Education & Careers Executive ...

Day In a Page

Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss
Tony Blair joins a strange and exclusive club of political leaders whose careers have been blighted by the Middle East

Blair has joined a strange and exclusive club

A new tomb has just gone up in the Middle East's graveyard of US and British political reputations, says Patrick Cockburn
Election 2015: Meet the top 12 wacky candidates seeking your vote in May

Election 2015

Meet the top 12 wacky candidates seeking your vote in May
Countdown to the election: Operation Save Danny Alexander shifts into high gear as the SNP target his Commons seat

Operation Save Danny Alexander shifts into high gear

The Chief Secretary to the Treasury didn’t forget his Highland roots in the Budget. But the SNP is after his Commons seat
The US economy is under threat because of its neglected infrastructure

The US is getting frayed at the edges

Public spending on infrastructure is only half of Europe’s, and some say the nation’s very prosperity is threatened, says Rupert Cornwell
Mad Men final episodes: Museum exhibition just part of the hoopla greeting end of 1960s-set TV hit

New Yorkers raise a glass to Mad Men

A museum exhibition is just part of the hoopla greeting the final run of the 1960s-set TV hit
Land speed record: British-built hybrid rocket car aims to be the fastest on Earth

British-built hybrid rocket car aims to be the fastest on Earth

Bloodhound SSC will attempt to set a new standard in South Africa's Kalahari desert
Housebuilders go back to basics by using traditional methods and materials

Housebuilders go back to basics - throwing mud at the wall until it sticks

Traditional materials are ticking all the construction boxes: they are cheap, green – and anyone can use them
Daniel Brühl: 'When you have success abroad, you become a traitor. Envy is very German'

Daniel Brühl: 'Envy is very German'

He's got stick for his golden acting career and for his beloved restaurant - but Daniel Brühl is staying put in Berlin (where at least the grannies love him)
How Leica transformed photography for ever: Celebrating 100 years of the famous camera

Celebrating 100 years of Leica

A new book reveals how this elegant, lightweight box of tricks would transform the way we saw life on the street and in fashion, on the battlefield and across the world