AJ Bell: ‘climate compensation for student loans’ could unlock potential £ 85 billion to invest in green initiatives

The AJ Bell investment platform believes the government should create a climate compensation program for student loans. The program would allow students to offset a portion of their student loans if they invest in existing government Green Gilts, which would be used to help the government meet its COP26 commitments.
The scheme:

• Reduce the impact of Augar proposals on students and give them the opportunity to repay their loans earlier
• Reduce the amount of student debt that the government will eventually write off
• Engage graduates with investment concepts at an earlier age
• Reduce the burden on government later in life through better investment engagement
• Provide the nation with a reserve of patient capital to finance the green economy of the future

The student loan firm has 8.5million clients with overdue balances of £ 160bn – if all invested £ 10,000, the government would invest £ 85bn in projects to help meet the country’s goals on climate change.

Context of the proposal

The Augar review on post-18 education in the UK has proposed a number of changes to the student loan system and it is likely that we will get the government’s response to the recommendations along with this month’s budget. -this. While Augar has proposed a reduction in university tuition fees from £ 9,250 to £ 7,500, the proposals come with a nasty sting in the tail. Lowering the threshold at which graduates are expected to start repaying their gross income and – far more pernicious – increasing the loan term from 30 to 40 years before outstanding balances are written off.

These proposals will harm average wage earners and especially women more seriously, as they will never be able to reduce the capital value of the loan. The proposal to extend the repayment period will see them bear an additional 9% tax for another 5 to 10 years. For a typical outstanding balance of £ 45,000 in debt at graduation, that could add up to over £ 10,000 in repayments.

For new undergraduates, the prospect of lower overhead costs may be enough to allay their concerns, but for existing graduates, the proposals do nothing. Worse yet, the prospect of having their loan terms changed in retrospect should be an issue they advocate against as much as some against the government’s climate policies.

How climate compensation for student loans would work

• People with student loans can offset their student debt balance by investing in existing government Green Gilts.
• The investment is made through an ISA to ensure no tax implications for the student and to encourage a wider investment commitment.
• Compensation would reduce their interest payments and the time it takes to repay the loan.

Impact of the proposal

A person receiving a £ 35,000 student loan under the Augar proposals would repay a total of £ 70,797 over 40 years, more than double the £ 34,674 they would repay under the current scheme.

Clearing £ 10,000 from this loan would allow them to reduce the amount they are repaying to £ 30,955 and reduce the term of their debt to 23 years, with an option to prepay after 17 years.

Alternatively, and perhaps more realistically, investing £ 100 per month and offsetting this with their student loan would allow them to reduce the amount they are repaying to £ 48,043 and shorten their term to 32 years, with an option of early repayment after 19 years. They would also accumulate a larger investment fund of £ 39,600

Full calculations provided in the tables below.

Kevin Doran, Chief Investment Officer at AJ Bell, comments:

“Augar’s proposals have the potential to deliver another financial blow, not only to the next generation of young professionals but to middle Britain, just as they grapple with the rising cost of living. Retrospective action could see them paying a heavy price.9% student tax for 10 years more than they agreed to when they chose to attend college and new graduates would start paying tax as well. earlier in their professional life.

“To help these people, who must now feel powerless to make changes on this issue, we suggest a recommendation to sit alongside those highlighted by Augar magazine. A change that provides a means and an incentive for students to repay their loans sooner. A change designed to engage students with their savings at an earlier age and a change that allows them to fund the future changes the world needs to reach net zero. ”

Impact of climate compensation for student loans:

Lump sum compensation of £ 10,000

£ 100 per month regular investment compensation

Why student loans and the Green New Deal are intrinsically linked

On October 31, the UK government will host the COP26 summit in Glasgow. Bringing world leaders together on a path to ‘net zero’ carbon emissions by mid-century, the summit will be used by the government to help shape the green industrial revolution announced by the Prime Minister in November 2020.

Backed by public funding of £ 12 billion, designed to ‘attract’ private funds, the ‘Green New Deal’ is expected to create 250,000 new highly skilled jobs in sectors ranging from offshore wind to small-scale nuclear and nascent hydrogen.

To create this workforce of tomorrow, or “net zero task force”, we must invest in education today. While the government’s Lifetime Skills Guarantee is a welcome step towards improving the country’s skills base, the high-value research, development and knowledge needed to unleash this potential will undoubtedly be generated at UK universities.

As a nation, we should be proud of our higher education institutions. Attracting students from all over the world, our advanced teaching seats have a rich history of global influence and have acted as an agent of social mobility.

Indeed, this quest for greater social mobility has been a key driver of the higher education policies of successive governments, leading to a doubling of the number of students since 1995, with even greater increases for the female cohorts and BAME. . Today, nearly 600,000 students are accepted into UK university courses each year.

Such participation comes at a cost. A cost to both students and taxpayers thanks to the misnamed and even more misunderstood student loan. Hosting the characteristics of a financial loan, the student loan scheme used in the UK would be more accurately described as a tax deferred on successful students. For all others, the tab is instead returned to the taxpayer.

Most student loans will never be repaid. Only 1 in 4 loans should be fully cleared, with the remaining three-quarters either only partially repaid or having no contribution from the graduate student, before being written off as bad debt in 30 years. .

As student populations have grown, the cost to students and to society has reached unsustainable levels. In the most recent year for which we have data, 1.3 million students took out £ 17bn in loans, adding on average £ 15,000 each to the balance of £ 160bn sterling student loans outstanding today.

So, as the next generation and the world focus their attention on the circulating carbon footprint by 2050, we believe that the circulation of student debt at stake by mid-century is expected to make headlines in many countries. similar levels, at £ 17 billion / year. annual loans are expected to reach £ 50bn / year and total unpaid debts will rise from £ 160bn to around £ 1.200bn by 2050[1].

Questions and answers

How much will it cost the government?

We believe the proposal is broadly neutral for government finances. The ability to control the skyrocketing interest on student loans is expected to reduce the amount of loans subsequently written off, representing the highest cost to the nation of the existing system.

Our proposal has the potential to allow top earning students to repay their loans earlier than currently expected, reducing the profits the treasury makes on these loans. While this is a direct cost to the country’s finances, it should be offset by lower interest rates payable on green gilts due to the expected increase in demand.

Why should students be able to repay less than what they borrowed?

To prevent students from having to “settle” the full repayment at the value of the initial loan in order to get rid of the 9% student tax

Doesn’t that only benefit the rich who might abuse the system?

If this is the case, a salary cap could be introduced at the upper threshold for calculating the interest rate since it is the loans that almost certainly repay in full.

What are the likely results of the government’s student debt review?

A series of recent research papers released by the House of Commons Support Unit provide insight into the government’s thinking ahead of the Chancellor’s Budget. The newspapers note that “given the state of public finances due to the pandemic, it is likely that any change in student funding proposed by the government will have to result in significant savings” – indicating that the proposals will include lowering thresholds repayment, an extension of the repayment period and even the prospect of raising the tax on graduates from 9% to 10%.