In the UK, if you haven't paid back student loans within 30 years they are written off. Why would the government institute such a policy? As far as I can see, it results in most people not paying back a large proportion of their loans, but it's not clear to me that this incentive is obvious to most people, which makes me think that wasn't the purpose.
I am interested in both the reasons stated by the government who brought the rules in, as well as why these policies exist in the first place.
Writing the debts off after 30 years is a way of linking repayments to earnings, as well as negating the risk of the loan to the student.
Loan repayments are usually made automatically as part of tax on your income, and no payments are required unless your income is over a certain level, currently around £26,500 - there is no legal way to avoid paying back the loan if you earn over the income threshold. The current arrangements came into force under the Coalition Government in 2012, as a result of the Browne Report in 2010, an independent review of tuition fees undertaken by Lord Browne. Before this change, the loans were written off after 25 years, and were introduced by the Conservatives in 1990.
Browne's report does, however, give us some hint as to why the 25/30 year clause exists:
As we will show under the section on paying back the costs of learning, the loans that students take on for meeting these costs are risk free. No one has to pay back the loan unless they are earning above £21,000 per year. Payments are linked to income. Graduates on low incomes do not pay interest. Any loan amount that is not paid off after 30 years is written off by Government.
The financial risk on the loans is therefore borne by Government, not by the student. This is exactly what the principles that we have set out recommend, but the consequence is that institutions bear no risk either. They could set unrealistic fees, out of proportion to the employment returns from the courses they provide, and yet still receive all of the fee income.
So part of the rationale is that the Govermnent does not want the fear of a loan to put students off of going to university - they will have the assurance that the loan is 'risk-free', as the cost of the loan is borne by the Government should the student fail to pay it off. In addition, no collateral is needed to secure the loan.
This Working Paper from the OBR gives us more insight into this policy decision:
The design features of student loans in the UK that differentiate them from conventional loans reflect the fact that students lack the collateral necessary to take out conventional loans and will know better than lenders whether they are likely to embark on a higher or lower earning career. This implies levels of risk for both borrowers and lenders that would lead to lower take-up of higher education than successive governments have deemed desirable. To address this market failure, student loans need to be large enough to allow recipients to smooth their consumption over their student and graduate years, and also – for that to be effective – to offer an element of insurance against low incomes after graduation.
As a consequence, student loans involve a significant subsidy element. The loans carry an interest rate in excess of many commercial loans, but repayments are contingent on the borrowers’ income rather than how much they borrowed. And it is the policy intention that a significant proportion of the money lent out and interest charged on it will be written off rather than repaid. This can be for a number of reasons, most notably that a student’s earnings may remain below the earnings threshold for the 30 years after they graduate, or they may rise above it too infrequently or by too small an amount to repay both their principal and the interest on it before the loan matures. Other potential reasons include a borrower dying or becoming permanently unfit for work and receiving a disability-related benefit. Only 30 per cent of English Plan 2 full-time higher education entrants in academic year 2017-18 are expected to repay their loan in full.
So according to the OBR, the policy intention from the outset was that a significant amount of loans would not be paid off. Nevertheless, the 25/30 year rule was included, firstly, to ensure that any repayments were linked to earnings - to ensure value for money and to prevent a university education only being economically viable as a pathway into well-paid jobs, secondly, to counterbalance the high interest rates compared to traditional loans, and thirdly, to pass loan risk onto the Government rather than the individual student, allowing individuals with zero collateral which would preclude them from taking out traditional loans to take advantage of the scheme.
When student loans were first set up in the 90s, they were only to cover the cost of living (food, accommodation, clothes, etc.). At that point tuition was still free, and there was still some grant funding in place too. Students like myself graduated with £10k of loans or less. The government envisaged that some students would fail to pay it off, but they would be a minority, and the amount of loan per student was relatively low.
Then tuition fees were added. Now the amount of loans became high, but the government still thought that (a) only expensive courses in top-flight universities would be charged the full amount, and (b) that those courses would still lead to higher pay. What they failed to account for was the cynical manipulation of students by universities.
First of all, every university immediately charged the maximum fees for every course. The government had explicitly said that this should not happen, but they found (as they'd been warned) that mere guidelines are worthless.
And secondly, every university immediately devalued its courses. The number of places for courses was massively increased, and the number of courses available was increased too. One effect of this was that many people started university who simply were unable to keep up, so lost whatever fees they had paid when they failed in the first or second year. And the other effect was that whilst before there were generally suitable jobs available for graduates, now there were not nearly enough jobs for the number of graduates. In the 1980s less than 20% of people went to university; now it is at least 32% of 18-year-olds, and over half of young people in total. In the meantime the standard of tuition has been reduced, as demonstrated by the number of Firsts now awarded; although this is merely a continuation of the reduction in quality of school-level teaching and grading.
The result is that the university system is now designed purely to extract money from students, loaned to them by the government on terms which the majority will never be able to repay, for education which in the majority of cases does not prepare them for a career or increase their earning potential. It is not designed to educate students well, only to squeeze them well for money.
My personal favourite example is my hobby, music. The magazine Sound On Sound estimated that there were approximately 20 roles available per year in recording studios; whilst the combined output of all universities in the UK was thousands of music technology graduates per year. Of course the vast majority found on graduating that their degree was worthless after graduation.
Universities were not required to link their courses to the post-education success of their students though. For that matter, they still aren't. So long as they can continue to con students into paying, they will continue. It's notable that all universities strongly opposed any form of league tables on student outcomes or student satisfaction rates.
And so we are where we are today. Universities continue to fleece students, and the government is having to make provision for a bill which will come due eventually.
It is worth noting that this applies to universities in England and Wales. Tuition fees in Scotland have remained free for Scottish and European Union students. In Scotland, only 23% of 18-year-olds enter higher education. I can't readily trace outcomes for Scottish students, but it does seem clear that the same "grade inflation" from England has not taken place in Scotland. Without a basically-infinite supply of tuition fee money conned out of students, Scottish universities have to operate within budgets set by government, meaning that student numbers have to be lower. By making this more selective, and by ensuring all students have access to education regardless of background, Scotland has largely avoided the mistakes of the English system.
So that people starting university don't have to worry about how they are going to pay for it for the rest of their lives.
There are 2 normal ways to fund Universities:
The problem with the first is that only rich people can afford the fees.
The problem with the second is that the people who benefit the most from university (who, on average, come from better-off backgrounds and end up richer than the rest of the population) pay no more relatively than people who don't go to university for whatever reason. So in both cases, the poor lose out to the rich.
The student loan system in the UK means that anyone can afford to go to university - the loan is automatic and guaranteed, and you don't need to worry about crippling debt in later life because you only have to make payments if you make more than the threshold each year, and only by a percentage of your income above the threshold.
The threshold is set at a rate that is more than enough to generally live on - no one is going to be made poor having to pay off their loans. So if you go to university, but still end up getting an average paying job, it costs you nothing. If you go to university and end up very rich, you pay in full.
Abolishing tuition fees would be using the taxes paid in by everyone to subsidise the few that go to university, and on average end up richer.
Personally I would increase the upfront fees and lower the interest rate to a commercial rate so that rich people can't avoid the interest by paying off early, but people seem to be scared that [more fees] = [more loan] = [worse]. I'd have no problem taking on a loan of hundreds of billions of pounds if I knew I didn't have to pay it off in full unless I'd somehow become easily able to.
I might also make universities buy insurance against some of the risk that students never pay their loans in full so that it becomes more expensive for them to run courses that don't lead to well-paying jobs.
You need to understand the context of the introduction: prior to the late 1980s students got a government grant for living expenses, which was means tested based on their parents' income. Government wanted to increase the number of people going to university whilst reducing expenditure (this was the Thatcher/Reagan era).
There was a strong feeling that a more conventional loan scheme would disincentivize the children of blue collar workers. Even today, there are people who take (say) law degrees late in life so that they can do pro bono charity work.
Most of this is personal recollection (I was a student at the time) but here is the best supporting quote I can find from Hansard. Apologies for reproducing the rather dated views on gender roles - "the past is a foreign country".
Mr. [Kenneth] Baker ... The obligation to repay the loan should spend on the income of the graduate. That is to say that a student who has a low-paid job on graduation should have his obligation to repay the loan suspended until he reaches a certain pay level. ... That is particularly important for women graduates who get married and have no source of income.
Secondly, the loan will be written off and cancelled either 25 years after it has been incurred or if the person has reached 50.
