The Royal Commission could trigger big changes in home loans

After holding seven rounds of public hearings and collecting more than 10,000 submissions, the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry is about to deliver its recommendations – which could turn the mortgage industry on its head.

The final report, which will be published on Monday afternoon, might recommend significant changes to how mortgage brokers get paid – which, in turn, would affect consumers.

These possible changes include:

  • Changing upfront commissions (from a percentage of the loan to a standard fee)
  • Abolishing trail commissions (which are ongoing commissions that the broker receives throughout the life of the loan)
  • Abolishing both upfront and trail commissions (forcing brokers to negotiate a fee, as financial planners do)

Why broker salaries are relevant to consumers

There are two reasons why consumers should care about broker remuneration.

First, Justice Hayne noted in his initial report that the current commission model is bad for consumers, because brokers have incentives to push Australians to borrow more than they need. If Justice Hayne is right, then changing the model might better align brokers’ interests with borrowers’ interests, leading to better outcomes for consumers.

Second, a new commission model might lead to a reduction in the average broker’s income, which would probably reduce the number of brokers in Australia. That, in turn, would probably mean that banks would win would back some market share from brokers – which would probably mean worse outcomes for consumers.

Why would that mean worse outcomes? The reason is that brokers offer more choice than banks. A typical broker will work with 20 to 40 lenders, which means they can help borrowers compare options from up to 40 institutions. Banks, though, will only show one set of loan products – their own.

What affects brokers will also affect consumers

All of this is just speculation, though. Time will tell what Justice Hayne recommends; and time will tell how many of those recommendations will be implemented by the government.

The only thing that can be said for certain is that any reform that affects mortgage brokers will ultimately affect consumers as well.

Student loan interest rates U-turn is coming after fierce criticism, Andrea Leadsom hints

A U-turn looms on much-criticised plans to hike the interest rate on student loans to an eye-watering 6.1 per cent, a Cabinet minister has suggested.

The Department for Education is “considering” a rethink on rules which set the rates on loans taken out since 2012 at the RPI level of inflation plus three per cent, Andrea Leadsom said

With RPI now running at 3.1 per cent, that means interest will soar from 4.6 per cent to 6.1 per cent from September – at a time when bank rates remain on the floor.

Current students will not pay this rate of interest, but it will be added to loans on both tuition and maintenance loans of millions of students who have graduated.

In the Commons, Conservative MP Richard Graham warned Ms Leadsom, the Commons Leader, that “a number of us are very concerned” about the soaring interest.

She replied: “I think the mood of many colleagues has been heard and I’m quite sure that the Department for Education is considering this.”

Any U-turn would come hard-on-the-heels of Theresa May ditching policies on social care, winter fuel payments, school meals, an energy cap and foxhunting, since her general election setback.

It would bolster Jeremy Corbyn who is campaigning for the abolition of tuition fees altogether, arguing they “saddle students with debt that blights the start of their working lives”.

Jo Johnson, the universities minister, has insisted the student loans system is “sustainable”, arguing more people from disadvantaged backgrounds are now able to go on to higher education.

But Mr Graham warned that “things have changed” since the Coalition government trebled maximum tuition fees, in 2012.

He pointed to this week’s report by the respected Institute for Fiscal Studies (IFS) which criticised “very high” interest rates on student loans.

They were part of the reason why three-quarters of students will probably never pay off their loans in full, because their debts are the highest in the developed world, it said.

Mr Graham said: “The level of interest at which both living costs and studies will be repaid rises to 6.1 per cent this September.

“That, allied with compound interest over a 30-year period, is what gave the IFS in their report yesterday the calculation of total debt being over £55,000. Now, I think a number of us are very concerned about this.”

Earlier this year, the Department for Education defended the leap in interest rates, saying: “Student loans are not like commercial loans as they have more favourable terms, including repayments being linked to income and not to the amount borrowed.

“Our student funding system is sustainable and fair. No individual will see their monthly repayments rise as a result of interest rates increasing.”

Under the student loan system, monthly payments are held in place but the length of the loan extends.

Students who earn over £41,000 will pay the top 6.1 per cent rate, while those with salaries between £21,000 and £41,000 will pay on a sliding scale of between 3.1 per cent and 6.1 per cent.

However, those who started university between 1998 and 2011 will be paying an interest rate of 1.25 per cent on their loans.

Three-quarters of graduates will never pay off their student loans, finds report

Most graduates will still be paying off student loans into their 50s, and three-quarters will never clear the debt, a new probe has found.

The Institute for Fiscal Studies (IFS) report said that initial gains made by poorer students in the controversial 2012 shake-up of the tuition fees system have been more than wiped out by subsequent changes.

The reforms brought in by the then Coalition government originally saw the lowest earning third of graduates better off by £1,500, but replacing maintenance grants with loans sent debt rates soaring.

The changes resulted in students from low-income families graduating with the highest debt levels of more than £57,000.

Expected repayments from the lowest-earning third of graduates have increased by about 30 per cent since 2012, while repayments by the richest third rose by less than 10 per cent.

“The combination of high fees and large maintenance loans contributes to English graduates having the highest student debts in the developed world,” the report states.

The probe said that interest rates on student debt were “very high” at up to 3 per cent above inflation.

The average student who borrows £45,000 ends up paying another £5,800 in interest, while higher earners may have to fork out £40,000 in interest repayments, the IFS found.

“There is a risk that better-off parents will pay fees up front, especially if they think their offspring will be high earners. This would increase the cost to government in the long run,” the study said.

The IFS found that low-cost arts and humanities subjects got much bigger increases in funding, 47 per cent, than high-cost science and engineering subjects, 6 per cent, between 2011 and 2017.

The report said: “Incentives for universities to provide high-quality courses in return for the money they receive are surprisingly limited.”

Changes to the system reduced annual government borrowing in the short run by nearly £6bn, and the financing of undergraduate education adds less than £1bn a year to public spending, the report said.

The moves have cut the long term cost to the taxpayer of higher education by around £3bn a year.

“This long-run saving is lower because outlay on student loans is not included in measures of public spending, and 31 per cent of the value of loans is not expected to be repaid,” the report said.

University funding has increased by about 25 per cent per student since 2011, primarily funded by richer graduates, and institutions now receive an average of £28,000 per student per degree.

The report stated: “Reducing tuition fees or bringing back maintenance grants would have the advantage of allowing government to target specific students or courses that have wider benefits to society. This would, however, significantly increase deficit spending and lead to a smaller, but still considerable, increase in the long-run government contribution.”

Jack Britton, an author of the report, said: “Recent policy changes have increased university funding and reduced long-term government spending on higher education while substantially increasing payments by graduates, especially high-earning graduates.

“There is probably not much further to go down this route, but proposals for reducing student fees tend to hit the public finances while benefiting high earners the most.”

Colleague Chris Belfield said: “Interest rates on student loans reached up to 6.1 per cent in March 2017 and are very high compared with current market rates. Combined with high levels of debt, this increases average debt on graduation by £5,800. There is no impact on the repayments of the lowest earners, but the highest earners can expect to repay up to £40,000 in interest payments.”

The IFS’s Laura van der Erve, said: “Universities are undoubtedly better off under the current system than they were before the 2012 reforms. However, their incentives have shifted towards providing low-cost subjects.”

 

Student loan repayment rate could be put up soon, Minister says

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The repayment rate on existing student loan debt could be increased by the Government within the next few years, the Business Secretary has confirmed.

Sajid Javid said he could not rule out retroactively increasing the amount graduates had to pay out of their salary before the next election.

Graduates currently pay 9 per cent of their income above a £21,000 repayment threshold, but the Business Secretary said the threshold or repayment rates might have to go up to stop budget pressures getting “out of control”.

Labour MP Paul Blomfield asked Mr Javid whether he had “any intention of changing either the threshold or the interest rates within the lifetime of this parliament”.

Mr Javid replied that he could not “commit” to such a pledge.

“I can’t tell you here and now that any of those numbers I’ve mentioned [repayment rate, repayment threshold, length of loan] can’t change during the life of this parliament but there are no current plans. It’s something that I just don’t think I can commit the government to,” he replied.

“In terms of what’s going to be uppermost in our mind in making these types of decisions is just making sure at all times what we have set up … is sustainable for the long term: the RAB charge doesn’t come out of control, and also that it doesn’t in some way, that if we did have a change it ends up capping the number of students.”

The “RAB charge” is the Government’s estimate of the portion of state loan expenditure that will never be repaid by graduates.

Mr Blomfield told the minister that graduates felt “sore” that the threshold had previously changed “in conflict with the contract that they thought that they had”.

Mr Javid added that he wanted to see the higher education system accessible to all people regardless of income and that there should be no cap on student numbers.

Tuition fees were introduced in 1998 at £1,000 by the last Labour government. They were later trebled to £3,000 in 2004.

In 2012 fees were raised to £9,000 by the Coalition government – including the Liberal Democrats, who had pledged to vote against any rise in fees and had advocated free education.

Tuition fees have been abolished in Scotland where university education remains free. Many other European countries continue to offer free education or have negligible fees.  Labour leader Jeremy Corbyn has said he would like to scrap university tuition fees.

Only 28% of recent graduates have been eligible to start repaying their student loans

Fewer than 28 per cent of recent graduates – the first batch to have paid up to £9,000 in fees – have started paying back their loans, meaning most are at risk of being put under financial pressure for life because they’re stuck in low-paying jobs.

According to new data from the Higher Education Statistics Agency (Hesa), as collated  by Vouchercloud as part of an investigation into student spending and finances, figures show that, with an average salary of £21,000, only half of the most recent cohort of graduates who entered full-time work immediately after their studies are paying any money back on their loan.

With many of 2015’s graduates still unemployed, working part-time, or continuing their studies, this leaves fewer than three in ten graduates, in total, earning enough to repay their student loan, the threshold for

The news has come weeks after the Hesa data showed over 50,000 new graduates to be in non-graduate jobs – including lollipop ladies, factory workers, and hospital porters – leading experts to question the value of costly university degrees in the Brexit climate.

The cap on tuition fees was lifted to £9,000 in 2012, with the benchmark for starting to repay loans rising from £17,495 to £21,000. Those who were undergraduates for three years completed their studies last summer, and have been eligible to make repayments as of April 2016.

Currently, some 75 per cent of universities charge the full £9,000 fees but, with the news this week that fees are increasing beyond this, many students are at risk of being left with their loan for even longer, particularly if they are paying off nothing or very little early on in their careers.

Government ministers themselves were seen to be questioning whether £9,000 tuition fee costs at some of the UK’s top universities could be justified given the “quality and intensity of teaching,” according to a leaked image of a private memo.

Paying back student loans looks set to become even more challenging since the Government froze the repayment threshold at £21,000 until at least 2020, despite originally promising to increase it with inflation. The move means more than two million graduates are being forced to pay back more than they had signed up for at the time they took their loan out, something MPs heavily criticised in a parliamentary debate.

Consumer champion Martin Lewis, who has been fighting the retrospective loan hike, said the tuition fee rise is worrying for the continued potential impact it may have on those from a background with no history of going to university.

He said: “Most people will not pay more because of the increase in tuition fees. This is because repayments are set at nine per cent of everything earned above £21,000, meaning most people do not already repay what they borrowed plus interest in full over the 30 years before their loan wipes. Only very high earners – those on starting salaries of roughly £40,000 and above inflation rate pay rises – will actually see the amount they pay in total increase because of this rise.

“The sooner we change the name of this finance from the misnomer of ‘student loans’ into the more realistic ‘graduate contribution’, the sooner we stop risking scaring many people who should be going to university off going to university for the wrong reasons.”

Chris Johnson, head of affiliate operations at Vouchercloud, said: “There was a suspicion, in among the initial uproar, that almost the majority of students would not be paying off the entirety of their loan in their working lifetime when these changes kicked in. However, it’s still surprising to see just how few students have hit the threshold straight out of university.

“With stats from Hesa last year showing over 60,000 graduates were working non-professional roles after they graduated – and with similar numbers this year – there are many students who eventually could end up paying a fraction of the total cost of their degree, putting financial pressure on them for life, and resting them under a permanent cloud of debt.”

The student loan situation in the UK is becoming increasingly tense, but arresting desperate graduates isn’t the answer

This week, the Higher Education Policy Institute (Hepi) announced it is lobbying for tougher sanctions on those who refuse to pay back their student loan, namely those who move abroad before doing so, and suggests graduates should be treated like tax evaders, benefits fraudsters, or even arrested if they re-enter the UK. Inspired by New Zealand, the think-tank wants to see student loan payment evasion eradicated.

On the surface, this seems fair enough. When you attend university, you enter into an agreement with the Government. They provide you with the funding to complete your desired course and, in return, you pay them back when you have graduated and are earning above a certain amount. Compared to the situation in America, it almost seems reasonable. Breaking the rules of said agreement should be met with some sort of sanction, as there would be if you were to move abroad to escape a bank loan.

That being said, what Hepi fails to recognise is that, in the UK, you have to go to university in order to guarantee you’ll have a high earning job. Unlike in the days of our parents, or our politicians, hard graft simply isn’t enough. You need a piece of paper to back it up. It’s hard to respect politicians who keep increasing the price of university while they brandish their degrees paid for by the taxpayer.

Nick Hillman, director of Hepi, said: “If the Government is serious about wanting to sell off the student loan book to the private sector, tougher penalties for non-repayment would also increase its value. Ministers, MPs, and peers should consider amending the Higher Education and Research Bill currently before Parliament to ensure higher repayment rates.”

The fact the Government treats student debt as a way to make money is the key problem. University has stopped being a way to educate future generations and has become a business. Forget increasing taxes on those earning £150,000; let’s have a higher repayment rate for the graduate earning £25,000 and living in London. Whitehall’s logic here is not fully sound, nor is it fully informed.

While I don’t advocate the decision to move abroad to escape your student loan, it should be a warning sign to the Government not to arrest graduates but to examine the reasons why they may resort to such desperate measures. The Hepi report comes after the Sutton Trust found England to have the highest level of debt per graduate than any other country in the English-speaking world. England’s grads are now leaving with almost £45,000 of student debt. By comparison, New Zealand’s graduates leave with just £23,000, the lowest of any other anglophone nation. So is it fair to compare England to New Zealand, when actually their graduates get a much fairer deal in the first place?

Everyone always throws around the figure of £9,000, a yearly amount that isn’t even the final price of a year at university. You still have to add in a maintenance loan, which often does not cover the cost of rent, so students have the added pressure of working a part-time job. NUS Insight found 64 per cent of students worry about money either all the time, or very often. Speak to any university undergraduate, and you’ll often find their biggest source of concern is their finances – not their course load.

Students should not be allowed to run away and escape their student loan. The responsibility of repaying a loan is part of being an adult. However, before Hepi makes sweeping statements about arresting students at Heathrow, it should consider the root cause of such an action. Maybe if the UK’s student loans were as low as they are in New Zealand, the same course of action would be appropriate.

Student Finance loans ‘illegal and unenforceable’, says top lawyer

Government student loans are “illegal” and “unenforceable”, a top lawyer has said, arguing that graduates must be reimbursed for signing misleading contracts at extortionate interest rates.

Students graduating from university this year face rates of 4.6 per cent on government loans, which cover tuition fees, living costs and repayable grants.

Concerns have been raised about the soaring cost of the loans, which could leave graduates paying out more than £100,000 – double the amount initially borrowed – according to independent analysts.

“The recent Article 50 Judgment restated Equity’s priority and government’s acceptance of this.

“Students also have legislative protection from ‘extortionate credit bargains’,” she explained, “which loans have become. That is why student loans are no longer legal, in whole or in part.”

Students in England are said to leave university faced with some of the highest debts the world – owing significantly more than their US, Australian and Canadian peers.

“When introduced in 1998, government student loans were relatively fair,” said Ms Clarke. “Since then, they have changed so much they have become illegal: tested in court, they’d be ruled unenforceable.

“On top of this, hidden amongst students’ expenses is a hefty portion of investor profit: student loans are lining the pockets of third party fat cats,” said Ms Clarke.

“Impoverished students use their loans to pay returns to the wealthy, at ruinous cost, without even knowing they are doing so.”

Last year Simon Crowther, a civil engineering student at Nottingham University, made headlines for contesting the legality of his student loan in an open letter to his MP.

He was in the first wave of students faced with £9,000 tuition fees and prompted a number of similar complaints from students who claim they were mis-sold their loans.

“The government needs to act before it has a national scandal on its hands,” Ms Clarke added, “Theresa May must repay students the amounts they overpaid David Cameron’s government.

“Student loans should have interest removed or charges capped at 1.25 per cent, not compounding. Loan agreements should be given to students so they know what they are signing.

“When such reforms are done and investor profit stops being students’ responsibility, student loans will start being legal.”

Last month it was revealed that more than 300,000 graduates had received refunds from the government-owned Student Loans Company after being wrongly overcharged in their loan repayments.

A spokesperson for the Department for Education said: “Interest rates are linked to RPI to ensure that student funding remains sustainable in the long term. There is extensive information and support to help borrowers understand the loan terms, and they must sign a declaration that they have done so.

“As the OECD has recognised, our student funding system is sustainable with a relatively high threshold before borrowers have to repay their loan.

“It removes financial barriers for anyone hoping to study with outstanding debt written off after 30 years. Graduates enjoy a considerable wage premium over non-graduates and repay their loans in line with income – at a rate of 9 per cent of earnings above £21,000.”

UK Government to repackage student loans mimicking sub-prime mortgage bundles

The UK Government has begun a much-delayed sale of asset-backed securities backed by student loans, in what it expects to be the first of a series of sales that could bring in £12bn for the finance ministry.

The plan to re-package student loans via securitisation — an instrument famously used to repackage sub-prime mortgage loans in the run-up to the 2008 financial crisis — and sell them on to investors was expected to be launched earlier this year.

It was then put on hold after Prime Minister Theresa May called a snap election.

“A subsidised interest rate is charged on the loans and repayments are uncertain because they are income contingent, so the government does not expect the outstanding balances to be repaid in full,” the UK government said in a statement.

The students covered by the loans in question only start to repay after they start earning above £17,775 a year.

Furthermore, the earnings threshold moves in line with the retail price index (RPI) each year.

Government borrowing unexpectedly grew last month, underscoring finance minister Philip Hammond’s challenge as he weighs calls for more spending in his budget on Wednesday against the prospect of weaker economic growth ahead.

An update from banks working on the deal this week suggested that marketing for the deal is drawing to a close.

The UK government is now expected to start negotiating pricing with investors next week with the publication of “initial price thoughts”, with pricing expected the following week

The securitisation, which will have four tranches with a range of ratings from Single A to unrated, will be sold through a special purpose vehicle (SPV) called Income Contingent Student Loans 1.

Barclays is sole arranger, and joint lead manager on the rated notes with Credit Suisse, JP Morgan and Lloyds. Barclays and JP Morgan are joint lead managers on the unrated tranche.

Student loans system forces nurses to pay back £19k more than lawyers, say peers

The student loan system has come under fire from peers after figures showed nurses must repay thousands of pounds more than highly-paid bankers and lawyers during their careers.

High interest rates on student loans should be cut from 6 per cent to 1.5 per cent to prevent middle-earning graduates from paying back more, the House of Lords economic affairs committee said.

The student loan repayment system in England is less expensive for highly-paid legal professionals and financiers who are able to pay off debts earlier on in their life and accumulate less interest.

Male nurses and midwives will repay a total of £133,000 over their working lives – which is thousands of pounds more than male financiers (£127,000) and legal professionals (£114,000).

The figures, which were published last year, have prompted fresh criticism from the cross-party committee, which has called for “immediate reform” to a “deeply unfair” system of fees and loans.

“The student loan system does not appear as progressive as its advocates have suggested – graduates who only just pay off the loan within the 30 years will pay far more in real terms than higher-earning graduates who pay the loan off sooner,” the report says.

The report from the committee argued that the higher education system offers poor value for money to students and the taxpayer, and that funding is “too heavily skewed” towards degrees.

Lord Forsyth of Drumlean, chairman of the committee, said: “The way we expect students to access higher and further education is deeply unfair. We must create a single system, including apprenticeships, that offers more choice and better value for money.”

He added: “The accounting trickery attempted by the government in 2012, in which the high rate of interest on student loans created the fiscal illusion that government borrowing is lower than it actually is, has had a devastating effect on the treatment of students in England.

“It is unacceptable to expect future taxpayers to bear the brunt of funding today’s students.“

Emily Chapman, vice president for further education at the National Union of Students, said: “[The report] confirms what many of us working in the sector have known for some time – the current student funding model is simply not fit for purpose.”

Sally Hunt, general secretary of the Universities and Colleges Union, said the report should be fed into the government’s post-18 education review, which is being undertaken by Philip Augar.

She said: “Now, more than ever, we must be able to offer decent opportunities for people to improve their skills, and to learn new ones.

“Part-time study and further education colleges will be central to that mission if it is to succeed.”

A Department for Education spokeswoman said: “We are undertaking a major review of post-18 education and funding, to make sure students are getting value for money and genuine choice between technical, vocational and academic routes.

Student loans sale by government failed to get good deal for taxpayers, MPs say

The Government failed to get the best deal for taxpayers when they sold off student loans for less than half their £3.5bn face value, MPs have warned.

The Treasury took a “short-sighted” approach to the sale of public assets in its effort to reduce government debt, the Commons Public Accounts Committee (PAC) has concluded.

Last year, the Government sold the first tranche of student loans with a face value of £3.5bn for £1.7bn- a return of 48p in the pound.

Ministers are expected to “get the best possible deal” on behalf of the taxpayer – and this did not happen, the report says.  The government received “too little in return” for what it gave up,“ it said.

However, the report acknowleged that MPs did not expect the Government to recover the face value of the loans in full as repayments rely on people’s earnings.

The Government’s own analysis shows it would have recouped the £1.7bn sale price in just eight years if it had held off from selling the loans.

It says: ”Treasury’s focus on reducing its ‘public sector net debt’ measure is a short-sighted approach which fails to convince us that the deal is the best one for public sector finances in the long term.

“The willingness to accept offers from investors if they exceed government’s theoretical ‘opportunity cost’ of holding the assets runs the risk of accepting too low a price.”

The damning report came after universities minister Sam Gyimah recently confirmed that the Government is planning to sell off another group of English student loans.

In light of this announcement, MPs call on the Government to “think carefully about whether its modelling is sufficiently developed to do justice to the real long-term value of these public assets.”

Meg Hillier, chair of the PAC, said: “Government will need to learn quickly from the weaknesses of this sale if it is to secure the best deal for taxpayers in future. When public assets are gone, they’re gone – in the case of this first student loans sale, for too little return.”

She added: “It is troubling that the Government could have expected to recoup the £1.7bn sale price in just eight years.

“Decisions on asset sales must fully consider value for money but I am not convinced that this transaction, with its narrow and short-term objective of reducing public sector net debt, is fully compatible with that principle.”

A Government spokesperson said: “We are confident that we achieved value for money for taxpayers from the first sale of student loans.

“As the National Audit Office has found, we received more for the loans than the value to Government of retaining them, further strengthening the public finances.

“Student loans are designed so that borrowers only repay when they can afford to – this gives more people the chance to go to university and get on in life, but, as the Public Accounts Committee recognises in its report, this also means many students will never fully pay back their loans.

“We welcome the report from the Committee and will issue a full response in due course.”