To accompany the Students in Debt event, which is part of PERC’s wider programme of research around debt and resistance to debt, the following briefing draws together the latest evidence and provides a perspective on the dangers and failures of the UK government’s policy on student loans. You can download the PERC Brief on Student Debt here.
Mortgaging the Future for an Education
Successive increases in university fees and now scrapping of maintenance grants for students with low-income parents are clear examples of the government seeking to replace public funding with more private debt. In practical terms students will take out this debt today and be expected to make repayments well into their 40s and 50s. Today’s young people must take on ever more debt for the same university education that other age groups got highly subsidised from the state. This is a frightening prospect for wider university ideals and paints a bleak picture of potential de-skilling of the UK’s workforce in years to come.
Policy-makers justify loans by claiming that students are the ultimate beneficiaries of the attainment of a university degree – a student loan is like a mortgage, you are borrowing to invest in an asset. This belief is based on seriously flawed assumptions about the contributions of students and universities to the wider UK economy.
The slow recovery in the UK job market means that it is uncertain whether today’s graduates will be able to enjoy the same income gains from a university degree as previous age cohorts (the same groups that had a state subsidised university education).
Students must pay more because of higher fees and scrapping of maintenance grants and pay more for these loans compared to the interest rate government or bank themselves pay for credit.
If student loans are like a mortgage, then it is a subprime mortgage. These are the same NINJA loan (no income, no job or assets) product; this time sold to a young people with no credit history.
Policy-makers claim a university degree is an asset; if so, then it is one that students are now paying dearly for and that universities continue to push for in order to safeguard their income.
Problems with the UK student loan market
Government reforms to higher education created the financial market for student loans. When tuition fees tripled, so did student debt levels: from £15 billion in 2005 to £54 billion in 2014.
George Osborne’s 2015 Summer Budget estimated that ending grants and replacing them with loans would save £2.5 billion by 2020-21. Independent research suggests that because repayments are expected to languish at £2.5 billion until 2019-2020 the government is expected to borrow £13.9 billion to make up for the shortfall – adding to public debt. The independent Office for Budget Responsibility estimates the peak impact on student debt at 8.8 per cent of GDP by the late-2030s.
Current government projections for the cost associated with current reforms will see public exposure to student debt increase from £100 billion in 2016-17 to £500 billion in the mid-2030s reaching £1 trillion by 2040s.
The UK’s current student loan market is a hodgepodge of different types of government-backed loans, with limited success in selling them on in secondary markets. Rothchilds Consultancy independent review of the student loan book concluded that it was so dismal that the proposed sell-off during the last Coalition Parliament was halted.
Income-Contingent Repayment Loans are an untested new loan product whose entire value is determined by opaque and highly optimistic modelling of repayment across a student’s life-cycle. Most importantly, Income-Contingent Repayment Loans are designed not to be fully repaid. Recent estimates suggest the vast majority (73%) of students will not repay their loan in full, with the average write-off at approximately £30,000.
Given the current global financial climate, there is unlikely to be much appetite from investors for this type of loans.
Students in Debt
We can already see the effects of the growing debt burden of higher fees. Figures from the Student Loan Company (the financial vehicle for government-backed loans) show the two different fee regime cohorts and in 2013-14 those in the 2000 repayment cohort average debt was £6,480 while those in the higher fees 2014 repayment cohort average debt was £20,060. The Sutton Trust estimates the average debt for current (not graduated) cohort at £44,000.
It is not just student loans either, university students rely on others forms of debt to support themselves during their studies. According to a Unite survey 36% students say they do not have enough to live on; they use overdrafts (27%), then credit cards (8.5%) and even payday loans (1.5%) to make ends meet.
Young people are taking on all kinds of debt to survive in Britain’s financialised economy. The Bank of England found that unsecured debt is the most prevalent among young people, with 79 % of 18-29 year olds having debt from credit cards, student loans, overdraft or personal loans. The value of unsecured debt is also higher for this cohort: a fifth of young adults owes between £ 10, 000 – 24,999 and 10% owing more than £25,000.
Higher fees have a wider impact on family life. Over half of young people are turning to their family to borrow money to make it through university. For most parents contributing financially toward their children’s university education is second only to their mortgage. To meet these higher costs, parents report to cutting back on their expenses, even turning to credit cards.
Last week’s student protest against the scrapping of maintenance grants highlighted how debt will continue to be a highly political issue.
Student Debt Exacerbates Inequality
Rising student debt levels are exacerbating inequality, threatening to eliminate a university degree as a route out of poverty and potentially be a source of downward social mobility.
Under the new loans regime low-income students who earn above the £21,000 threshold are likely to repay more in total; this is most likely because lower-income students pay only the minimum and stay in repayment longer. The Independent Commission on Fees found that low-income earners stay in repayment period for an extra four years compared to higher-income counterparts. Staying in repayment longer means that lower income earnings will pay an extra £9,000 for their degree in real terms.
Recent analysis shows that students from the poorest backgrounds are likely to graduate with the highest levels of debt. Osborne’s plan to convert maintenance grants into loans for students from low-income household in the July 2015 budget will only burden the poorest with more debts. The Institute for Fiscal Studies reports that the poorest 40% of students going to university in England from 2016/17 will graduate with debts of up to £53,000 (up to £40,500) for a three-year degree.
At University, students from low-income background experience financial hardship and stress; in particular among groups already socially excluded form university: where black students, students estranged from their parents, mature students (31-40 year-olds), care givers and disabled students are the most likely to experience debt related stress.
A major concern about the current loans regime is how it affects social mobility. The Independent Commission on Fees says there has been a significant and sustained fall in part time students and mature students.
More Debt Creates More Economic Problems
The United Kingdom needs a highly-skilled workforce and a University education is central to achieving this. The Department for Business, Industry and Skills found that University graduate skills accumulation contributed to roughly 20% of GDP growth in the UK from 1982-2005. Universities contributed around £39.9bn to GDP in 2011-12.
Consecutive rounds of government-imposed reforms in the higher education sector have created a market for student debt; the latest Green Paper continues the trend of expecting students to take on private debt so the government can claim to be reducing its public debt. In reality both private and public debt levels continue to grow.
Ever rising levels of student debt solves none of the problems of funding for Higher Education, nor does it limit public debt levels. But it does create more economic problems by directly downloading debt on to young people – making them mortgage their future to enter a perilous job market – and creating a financial market for highly suspect ‘income contingent loans’ which are a totally new loan product.
This post is a part of the ‘Crafting an Alternative Politics of Debt’, ESRC Knowledge Exchange Opportunities grant (ES/ M006433/1)