by David Craig
During their first ten years working, the graduate wouldn’t have to repay anything because repayments only start once a person is earning over £25,000 a year. Moreover, no further interest would be added to their loan during these ten years as interest only starts accruing once the graduate earns over the £25,000–a–year threshold.
During their second decade in work, while earning £35,000 a year, the graduate would repay 9% on £10,000 a year (their salary of £35,000 minus the £25,000 threshold). That’s £900 a year. However, each year their debt would accrue interest at 1.5% – about £750 a year on average (this would be slightly higher at the start of the second ten years in work and slightly lower towards the end). So, the graduate would only succeed in reducing their outstanding loan by their payments of £900 per year minus £750 per year interest which gives £150 a year. By the end of this decade, the total owed would be around £49,500. Even after their ten years of repayments, this graduate would still owe slightly more than the £48,000 they had initially borrowed.
Then, during their third decade in work, the graduate would repay 9% of £25,000 a year (their salary of £50,000 minus the £25,000 threshold). That’s £2,250 per year. But over these third ten years in work, the graduate would be accruing interest at 3% – over £1,250 on average a year. During this third decade in work, the graduate would reduce their loan by less than £10,000 (£2,250 a year payments minus interest of over £1,250 a year equals less than £1,000 a year for ten years).
So, even though this fairly well–paid graduate would have been repaying their loan for twenty of their first thirty years in work and have repaid a total of £31,500, they would still owe over £39,500. After thirty years, the rest of the loan – over £39,500 – would be written off. Many graduates will come nowhere near these earning levels. The Institute for Fiscal Studies (IFS) estimated that around 83% of graduates would fail to repay their loans in full within the thirty years repayment window.
The way the student loans system works creates two very distinct groups of graduates. There are the 17% (using the IFS figures) of graduates who will go on to be high earners and be able to pay off their loans in full. For these graduates – lawyers, doctors, engineers, bankers, business executives etc – the student loan resembles any other form of loan in that there is a strong incentive to pay it off as quickly as possible to avoid the debilitating burden of compound interest. If a graduate believes they will be earning comfortably over £60,000 within twenty years of their graduation, and hasn’t taken any career breaks, for example, to have children, then they should probably investigate whether it would be worth paying off their loan as rapidly as they can.
However, there are the 83% of graduates (again using the IFS figures) who will fail to pay off the total of their loans plus interest. For these 83% of graduates – nurses, teachers, social workers, most arts graduates – the loans system works like a ‘graduate tax’ rather than a loan. This is because the amount they have to pay each year will only be linked to their earnings, not the size of their debt. As with any tax, they should pay as little as they legally can. Anyway, by the time graduates have reached the point of thirty years after graduation, their student debt almost magically ‘disappears’ whether they owe £10, £10,000 or £50,000. Some of these students in the 83% may feel a psychological pressure to try to pay down their loans as it may make them feel they are reducing their debts. But to do this would be financially illiterate. This would just be throwing money down the drain. After all, most people don’t go to HMRC and offer to pay more income tax than they actually owe. Similarly, their parents or grandparents may think ‘if I give say £10,000 to help reduce a graduate’s student debt, this will make it easier for them to get a mortgage’. Again this would be wrong. A gift of £10,000 to help pay a deposit on a home would no doubt be very helpful. But for most of the 83%, £10,000 to reduce their student loan debts would be money torn up and chucked in the bin. So, for 83% of students (and their parents and grandparents) there is an almost perverse incentive to pay off as little of their student loans as they legally can. That’s wonderful for these 83% of students. They should relax about the size of their student debts and have a party. It’s not quite so wonderful for the taxpayers who are going to have to pick up the tab for the tens of billions of pounds of unpaid loans.
For years there has been dispute as to how large a liability the taxpayer will face. Worryingly for taxpayers, in 2012 the investment company Skandia seemed to corroborate the above figures when it estimated that:
“....unless a student starts earning £50,000 per year immediately after graduation, it’s likely that a significant amount of this debt will be written off by the government. In 30 years’ time the UK government is likely to be sitting on huge liabilities as it is forced to potentially write–off debt of between £30,649 and £64,935 for each full–time student who graduates.”404
In 2012, three million people in the UK (10% of the workforce) earned above £50,000 and the number of new graduates who did so was negligible.405
The net impact of graduates who are unable to repay their loans is covered by the term ‘the Resource Accounting and Budgeting (RAB) Charge’. This is effectively bad debt that will have to be taken from other areas of government spending like the NHS, defence or social care, though not, of course, from our ever more generous foreign aid budget. Prior to the introduction of the new funding system with the £9,000 per year plus inflation ceiling on tuition fees in 2012, the government expected an RAB Charge of 26.5%, meaning that “...for every £1,000 in loans, approximately £735 would be expected to be repaid with the remaining £265 being ‘lost’.”406 In May 2011, the Higher Education minister David Willetts wrote an article for the Times Higher Education Supplement noting: “We estimate that about 30 per cent of these loans will not be repaid – close to the estimate reached using slightly different methodology by the Institute for Fiscal Studies.”407
This estimate contrasted sharply with a government publication examining graduate earnings later that year, which suggested an RAB Charge of 37%.408 In other words that £370 out of each £1,000 spent on loans would have to be written off. In 2011, the university think tank Higher Education Policy Institute (HEPI) argued that when the RAB charge reached above 47%, the new system with its £9,000+ per year fees would be more expensive than the old system with its £3,000 per year fees. They stated: “Our view is that a RAB cost of 50 per cent or higher is quite possible for a three–year programme for students paying a £9,000 fee and taking out maintenance loans of £4,000 per annum.”409
But the RAB charge could indeed be higher than 50%. Many experts have also questioned the government’s assumption about the long–term resilience of graduate earnings. In 2012, the Intergenerational Foundation think tank produced a report called False Accounting which noted that:
“... the viability of the loan scheme depends on making predictions about the general shape of the economy and graduates within it for the next three to four decades. Current indications about the graduate premium suggest it will be eroded further except in a small group of professions.”410
This brings us on to another great unknown: how many graduates will emigrate to avoid repayment? A 2012 Home Office report into emigration found that nearly 50% of those leaving were either professionals or company managers and very likely graduates:
“...a ‘large and increasing’ number of executives, scientists, academics and doctors have chosen to leave Britain in the last 20 years. Around 149,000 British citizens emigrated last year, and 4.7 million now live overseas.”411
Even if we adopted a low estimate of 25% of emigrants being graduates, this would require the Student Loans Company to obtain payments from around 37,000 graduates who emigrate each year, or face writing off at least £1.8 billion of debt annually. The graduates who emigrate are also likely to be those with the highest earning potential, the very graduates upon whose repayments the financial sustainability
of the loans system is based. Professor Robin Lane Fox, an Oxford academic, observed:
“I live daily with the debtors at ground level. When consulted, more than half of them say they will emigrate rather than repay. Otherwise, they are condemned to a nine per cent rate of surcharge on their income tax for the next 30 years.”412
Higher Education Statistics Agency figures in 2011 showed a significant increase in the number of UK graduates from elite universities moving overseas six months after graduation: “Almost one–in–10 British graduates from institutions such as Cambridge, Durham, Exeter and Oxford who found jobs in 2011 were working overseas. It emerged that 5,175 students were working overseas, an increase of 27 per cent.”413
Does the Student Loans Company (SLC) have a robust system in place to ensure that this debt is recovered? The SLC is already experiencing great difficulties collecting repayments from EU graduates. Student loan schemes in New Zealand and South Africa have faced the same problem and struggled to find a workable solution. These schemes operate on a much smaller scale, however. This is without mentioning the ongoing organisational troubles of the Student Loans Company itself. The suspension and eventual dismissal of their Chief Executive in 2017 was followed by a public spat with senior Whitehall figures about the organisation’s fitness for purpose. As the Guardian noted in 2017, this was the third Chief Executive to leave the organisation under a cloud since 2010.414
The company has also been involved in widespread allegations of fake debt collection notices being sent to students and escalating levels of complaints about poor customer service. In 2016, 86,000 graduates were overcharged by the company’s systems after repaying their loans.415 There have also been regular reports of bullying and alarming rates of staff sicknesses – 16 days on average annually – within the company. 416 This compares rather unfavourably with 8.5 days per year in the public sector as a whole and just 5.2 days in the private sector. Any of these individual issues should give pause for thought; taken together they raise serious questions about the competence of this organisation to deliver such a Herculean task.
The inherent problems of the student loan book are apparent to the private sector if not the government. In 2008, the New Labour government passed a bill allowing it to sell the student loan book off to the private sector. Despite many attempts, it took until early 2017 for a government to announce the sale of a mere £4 billion of student loans for graduates from 2002 to 2006. Perhaps what this delayed sale illustrates is that the private sector understands that a student loan book is only as valuable as the qualifications it underwrites. After all, if their degrees don’t provide graduates with well–paid jobs, there will be insufficient graduate earnings with which to pay the graduate loans. A poor degree choice is not only a bad investment for the graduate, it is also a bad investment for whomsoever lends them money to study. All of the above raises the interesting question as to exactly how the government valued the loan book to enable its sale. Given its extended gestation, a cynic might be forgiven for wondering about the small print of this deal and what it will eventually mean for Britain’s long–suffering taxpayers.
The government has changed its estimates of the level of non–repayment of student loans from 30% to 37% to 47% and back to 20% over six years. These constant changes should start worrying taxpayers who are going to have to pick up the bill for the student loans fiasco. After all, it is no more possible to procure substantive repayments from a cohort of forensic science graduates–cum–baristas than it is to wring blood from a very reluctant and uncooperative stone. This all leaves a worrying open question: who is going to pay for the £100+ billion student loans outstanding by the time this book is published?
The social impact of student debt
“You can’t not live on credit’; ‘living within your means: credit’s part of it – what you can get… loans, credit, debts” Jo, Politics and Philosophy (undergraduate)”417
One major social change that the student loans fiasco has contributed to is a shift in young people’s attitude towards debt. In the first instance, the vast majority of students now have no choice about taking out loans to cover their tuition fees and living costs. They have no other way of paying. Throughout their degree they are also likely to run up overdrafts and take on credit cards. All of this is slowly but surely desensitising students and graduates towards debt. As long ago as 2002, when university tuition fees were much lower than today, a survey by Kensington Mortgages found that student debt was regarded by many young people as the starting point for money problems later in life:
“About 63% of 18 to 30–year–olds who have money problems claim they were caused by student debts, while 28% of people who regularly miss debt repayments also blame their time as a student for their situation. Across all age groups, 14% of people who are in debt say their troubles started when they were trying to survive on a shoestring while studying at university.”418
Whilst some in the university sector have protested about the rises in student fees, in practice most universities have simply pushed up their fees as high as they dare and banked the cheques. It would be a rare sight for any university to advise a prospective student not to take a degree with them as the degree will cost more than it’s worth to the student.
With the phasing–out of the student grant and the introduction of student loans from 1990, the creation of top–up fees in 2006 and the trebling of fees in 2012, universities have actively encouraged and facilitated this accrual of debt. After all, they have ever–increasing numbers of courses to fill with university course tuition–fees fodder.
This normalisation of debt has been based on the idea that a degree is a solid investment in the young person’s future. Students and potential students have been assured time and time again that this will ensure future dividends through a much higher earning capacity. However, the evidence suggests that for the majority of students – both those taking vocational courses, for which there is a limited jobs market, and those taking dumbed–down, soft degrees from third–rate institutions for which there is virtually no jobs market – this is simply not the case. Despite this, neither governments nor universities have suggested any possible downsides or small print to this debt for graduates, their parents, or indeed, for taxpayers. Unfortunately, these downsides are now becoming quite evident. A reduced disposable income can mean that the rites–of–passage experiences which young adults expect: being able to move away from home; running a car; buying a house; getting married and starting a family are now being delayed or prevented altogether. Individually, this can be demoralising and depressing. At the national level, it is effectively placing barriers between a generation of heavily–indebted graduates and life as independent and self–sufficient adults. These are not additional or lifestyle extras, these are the basic expectations of adult life. Rising levels of graduate student debt are putting these fundamentals ever further out of the reach of graduates. As the levels of graduate debt increase, so we should expect the severity and frequency of debt–related problems to increase.
Housing
Perhaps the most obvious example of the social impact that this debt is having can be seen in the growing problems faced by graduate first–time home–buyers. Even as long ago as 2006, before the economic crash and increased fees, research by Scottish Widows found 53% of graduates under 40 unable to access the property market. The report noted that:
“Home ownership is such an ‘unrealistic dream’ that one in ten say they cannot ever imagine buying, and almost half of them think it could be between two and ten years before they buy their first home. Even among those graduates who have succeeded in getting on to the property ladder, almost two–thirds had to rely on buying with a partner and 68% said they would not be able to buy them out if they were to split up. Almost a third say they cannot save for a deposit.”419
Another report in 2006, published by the Thomas Charles Debt Consultancy, supported this pessimi
stic outlook amongst graduates. When they examined graduate home ownership from 2001 they found that: “Only one in ten people who have left university since 2001 currently own their own home, with 58% saying they have been unable to purchase somewhere because of their debts.”420
Despite the government’s assertions to the contrary, the evidence suggests that the increase in student fees and maintenance loans has seriously exacerbated this problem. Research in 2015 by the Higher Education Commission warned that: “Thousands of middle–class professionals face missing out on mortgages because of ‘onerous’ debts generated by the new university tuition fees and the ... implications of such high levels of graduate debt at a time of stagnating wages and rising house prices”421
The study continued to raise concerns over the problems created by: “… financial rules requiring mortgage lenders to track monthly outgoings – including loan repayments, gym membership and socialising – when assessing mortgage applications.”422
The problems caused by monthly loan repayments were underlined in 2012, by research from the Royal Bank of Scotland. This showed that repayments, on an average graduate salary and after essential bills, accounted for 7% of the disposable income that a first–time buyer needs to save for a deposit. The same research also showed the problems that these loans create in paying a mortgage once a house has been purchased. Without student loans, a buyer with a 90% first–time buyer mortgage on a graduate income would spend 40% of this income on their mortgage, with student loans this increases to 44% on average and 60% in London. 423
Large numbers of graduates are finding it not only hard to buy a house but simply to move out from the family home. In 2011, research by Mintel found that 27% of these “boomerang” graduates were living with their parents.424 The latest figures from the ONS show a record 3.2 million 20–34 year–olds still living in the family home, a 28% increase from 1997. 425 At the same, time the average age of first–time buyers in the UK had risen to 37 in 2014 – up from 23 in the 1960s and 30 in 1974.426
