An Abridged History of UK Student Loans

Today I want to talk, or rather vent uncontrollably, about Student Loans in the UK and my recent experiences, but first I’m going to give you all a short history lesson.

Student loans were first introduced in the UK in 1990. Previously the various local councils were responsible for paying a student’s tuition fees and a small maintenance grant for living costs. Naturally such a system was entirely at odds with the political philosophy of the incumbent Tory Party Government who decided to revamp the entire system. After all if the government is just handing money to students how can the right people possibly profit? At this point they seem to have cast their eyes across the Atlantic to the increasingly toxic system of public loans that had sprung up in the United States and thought, “that’s a damn good idea”.

I’m glad to say that the idea of paying for education doesn’t sit well with the general public in the UK. I’d like to think that the public in the US are of a similar mindset, but given their resistance to universal healthcare I wouldn’t be surprised if the majority thought it was one step away from a communist plot.

Since the Tories knew that handing student finance to private enterprise would be political suicide, but equally they also wanted to they settled on the idea of paying grants for tuition fees, a smaller means tested maintenance grant and a student loan for students to bring them up to the same level of support enjoyed by their predecessors. To administer the process the government created the non-profit, publicly owned Student Loans Company which issued the first UK student loans to students starting university in the 1990/91 academic year.

These first student loans, issued from 1990 to 1997, are known as Mortgage Style Loans. They were sold to students on the basis that they, unlike regular bank loans these were owed to the government, were low very interest and would only be due for repayment if, and when, a student was earning over a certain amount.

The Mortgage Style Loans are paid back in fixed instalments starting in the April that follows the student’s graduation or withdrawal from the course. The payment schedule is fixed by statute : The debt is simply divided into 60 monthly repayments (or 84 if you took out more than five loans).  The loan is normally repaid by direct debit.

What makes the mortgage style loans different from normal consumer loans, and the later Income Contingent Repayment Loans that I will come to in a moment, is that the debt repayments can be deferred for twelve months if the debtor is under a certain annual gross income amount. I should mention that interest, based on the Retail Prices Index, continues to accrue on these loans even when they’re deferred (that’s about 3.3% APR in 2014).

In 1997 the new UK government, Tony Blair’s New Labour, quickly realised that they weren’t getting their money back from this system. A sizeable number of people completed their course, but were unable, for many valid reasons, to secure jobs that would put them over the threshold for repayment. Their solution was to change the system to the new Income Contingent Repayment (ICR) Loan System. There were several important, and radical changes involved in this restructuring. Firstly the maintenance grants were abolished meaning that support with living costs would be entirely through the student loans. This effectively doubling the amount of debt foisted upon each student. They also decided that students should start paying tuition fees at £1,000 the same time further increasing the debt load.

If there is one saving grace to the new system it’s that they also changed the repayment structure from fixed instalments to a system where repayments are collected directly from the student via their wages. All earnings over a certain threshold, which increases every year by a small amount, would have 9% taken as repayment. Although this means that students are now far more likely to have to repay their loan, they aren’t burdened with large monthly payments or with the potential threat of debt collection agencies, poor credit ratings or a fickle deferment process.

After this upheaval the system stayed the same for over a decade. Those that were eligible to repay slowly paid back the money, and those eligible to defer continued to put off repayment year on year. It wasn’t ideal, but the system worked fairly well for the most part.

Nothing is static in the corridors of Whitehall and Westminster however and the student loans question still occupied a few shadowy minds. The first inkling that something was happening behind the scenes came in 2008 when Gordon Brown’s short-lived government suddenly decided to sell off the oldest Mortgage Style Loans to two companies, Thesis Servicing and Honours Student Loans, who took over direct ownership of the debt. This caused a short-lived panic among those whose debts hand been sold, but this settled quickly when it became clear that the Student Loans Company was still responsible for deferment and administration. Other than receiving separate account updates the system continued as before and everyone calmed down.

In November 2013 the Tory government announced it was selling the remaining Mortgage Style Loans to a new company called Erudio Student Loans. The announcement passed with little fan-fair at the time and most people who still have these loans assumed this was simply another iteration of the sale to Thesis and Honours. As it turns out however everyone with these loans, and everyone that’s ever taken a student loan in the UK should have been paying close attention to what’s happening now.

In my next post I’ll recount my own personal experiences thus far.

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