Student Debt a Disaster for Future Graduates

Repayment of student loans is already so patchy that the portents are disturbing for future repayment of the much higher loans from 2012-13.

The Student Loans Company reports[1] that, of the England-domiciled student borrowers who graduated in 2000, one in seven, 14%, earned too little in 2010-11 to have to make repayments, and another 10% were unemployed. Another 3% had ‘disappeared’ and 4% more were receiving payment holidays. That totals 31%, nearly one in three, not making repayments, 10 years after graduating. This compares with 23% who made at least one repayment in the year.

In those 10 years, 45% of the 2000 graduates had repaid their loans. We need to remember that back then, loans were much smaller than they are now, and from this September they soar again. The average value of loans taken out in 1995-96 was £1,250, and in 2000-01, £2,900.[2] From 2000, repayments have begun when annual income exceeds £15,000, at the rate of 9% of income above this threshold.

New students this September will face tuition fees of up to £9,000 and will be able to borrow up to £7,675 for living costs if they study in London, up to £4,375 outside London. This means that London students will have access to up to £16,675 in their first year, and this starts to accrue interest charges straight away.

The interest charges are going up too. They will be at the RPI on incomes under £21,000, RPI plus up to 3% on a sliding scale on incomes between £21,000 and £41,000, and RPI plus 3% on incomes over £41,000. Repayments will be at the rate of 9% of income over £21,000, but incomes below this will not escape, because interest charges will be applied and rolled up until the payment threshold is reached.

Compared with interest rates on savings – negligible in 2012 – and with the 1.5% interest rates on student loans in 2010-11 and 2011-12, the new rates will appear sky-high. As an example, the Retail Prices Index, RPI, was 3.1% in May 2012. Add 3% on top, and the rate becomes 6.1%. The new loans will remain live for 30 years, up from 25 years currently, and will be very hard to repay for graduates who  move in and out of the threshold, because the longer the loan takes to pay off, the bigger the interest bill.

Graduates today are more likely than ever to be in low-paid jobs – as waiters, bar staff, cleaners, receptionists, and the like. For the final quarter of 2011, 35.9% of workers who graduated in the previous six years were in jobs that did not require a degree, and another 9.1% were known to be unemployed.[3] Low-paid jobs and high rates of interest on student loans are not good companions.

Students should pay for their education, the argument goes, because they will benefit financially. That has never been true for all students, and becomes less true overall with each passing year.

The costs of higher education are diverging in the nations of the United Kingdom. Wales will require Welsh-domiciled students studying anywhere in the UK, and EU students studying in Wales, to pay tuition fees up to £3,465 from September 2012. In Northern Ireland, Northern Irish and EU students studying in the province will also pay no more than £3,465. In Scotland, Scottish-domiciled and EU students continue to have fee-free higher education. Devolution is leading to very different patterns of subsidy – or not – for higher education. Currently, English-domiciled students have the worst deal.

In three years’ time, students will be graduating with debts that a few years ago would have been a medium-sized mortgage. Debts of around £40,000 for students outside London, and £50,000 for students in London, will be common. Add the hefty interest rates, and the 30 years before debt is written off, and higher education transforms into a disastrous financial millstone, especially for the very many graduates who never become higher-rate taxpayers.

The electoral gains that Tony Blair’s New Labour acquired from its promise to provide higher education for half of all school-leavers have turned into a financial ball and chain that students and their families have to lug with them for decades. How could we improve matters? A few ideas: more distance learning and local study centres, so more higher education students can remain living (usually more cheaply) at home; a national investment bank – not a derivatives casino – to build up sustainable, low-impact enterprises in renewable energy, recycling, biotechnologies, water and soil management, and so on, ventures that will employ graduates (and pay them); and a clampdown on corporate tax evasion, with the recovered money invested in public services including education, which should be seen as a social necessity and not as a private consumer purchase.

Statistics from the Student Loans company, table 1(ii), borrowers who were students domiciled in England studying within the UK, and EU students studying in England.

[2] ‘Student Loan Statistics’ by Paul Bolton, House of Commons Library, June 19th 2012, Note SN/SG/1079.

[3] ‘Graduates in the Labour Market 2012’, from the Office for National Statistics, March 6th 2012.


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