Revelations that some 89,000 graduates have over-repaid their student loans to the tune of around £51m demonstrates that a problem which many suspected to exist is in fact far worse than anybody could have dreamt. What should be done in the longer term? And what can graduates do to help themselves now?
Let's start by putting the scale of the numbers in context. At 31 March 2017, across the UK the Student Loans Company (SLC) was managing £100bn of student debt. For comparison, BBA data shows that, at 30 September 2016, banks had made personal loans totalling just £37bn to residents of mainland Britain. When one considers the requirements for accuracy, transparency and accountability which are imposed on banks, it seems inexcusable that the much-larger SLC is not required to operate to exactly the same standard.
But here's the rub. Most student loan repayments are made via the PAYE system. The SLC is dependent on HMRC providing information about repayments. On the face of it, that shouldn’t be a problem. After all, HMRC imposes real-time information requirements on employers. Unfortunately, HMRC doesn’t impose the same standards on itself. Instead of accounting to SLC immediately for repayments of student loans, recent statements made by HMRC and the SLC indicate that data and cash may not flow from one to the other until anything up to seven months after the end of the tax year. To put it another way, a graduate employee may have paid off their student loan at 30 April 2016 but the SLC may not know about that until the end of November 2017. Even if the graduate does spot what has happened, and tries to prevent further deductions, the process can be little short of a nightmare.
We can see absolutely no reason why HMRC should not provide real-time information and balance transfers to SLC, demonstrating accountability and transparency all round, and allowing graduates to plan their affairs with confidence. That includes not suffering incorrect payroll deductions, as well as making it easier for graduates to secure personal credit and demonstrate mortgage affordability.
History shows that HMRC is extremely good at collecting taxes but does not have a distinguished track record when other government departments use it to make payments. Think of tax credits as an example of that.
In our view, the sale of the student loan book will do nothing to remedy these problems. With so many departments involved in the SLC, we therefore call on the National Audit Office to follow up its 2013 review with a fresh appraisal of what is going wrong so that ministers can bring forward legislation in this session of Parliament. Only by imposing a statutory obligation on HMRC and the SLC to conduct themselves in the same way as any reputable commercial lender can Parliament bring an end to this problem.
But what should graduates be doing now? Two years before the estimated repayment date of a student loan, the SLC contacts graduates to invite them to transfer from payroll deductions to direct debit. Whereas payroll deductions are made by employers and controlled by HMRC, direct debits are originated by the SLC. With at least one full tax year between signing up for a direct debit and the final repayment of the loan, there's time for HMRC delays to be overcome. The system isn’t perfect but, by taking ownership of their student loan repayments in this way, graduates can go a long way to avoiding the problem.
For more information please get in touch with George Bull, or your usual RSM contact.