Student loans hit the news again, hopefully for good reasons, with the Government promising a long overdue review of student funding and an anticipated overhaul of the system. The hike in tuition fees, increased interest rates and scrapping of maintenance grants, has seen costs soar for all students, with the Prime Minister admitting that England now has ‘one of the most expensive systems of university tuition in the world’.

Source: Sky News

We talked to final year students and recent graduates to hear their views, how they manage their money and how large debt affects their attitudes and decisions. We have outlined the key issues with the current system, the financial and psychological impact, and the changes we would like to see.

1. Maximum Tuition Fees

With almost all universities charging the maximum £9250 annual fees, irrespective of contact time/research/facilities, Theresa May commented that ‘the level of fees charged does not relate to the cost or quality of the course’. She proposes that universities charge less for some courses, but based on what criteria – cost, contact time, potential graduate earnings, value to society? There are many considerations, including a danger that fewer people will study engineering, science or medical subjects if they cost significantly more than arts and humanities courses. Students have voiced concerns that the less well-off would feel pressured into taking lower cost courses, rather than following their aspirations of becoming a doctor etc. However, it could be argued that some courses could be completed in a shorter time frame than 3-4 years, so it would make sense to offer greater diversity in the cost and length of courses.

 ‘I studied history and had 9 hours of lectures and seminars a week. There’s a load of reading on top, but still way too much time to waste on Netflix! If you have so few hours’ contact time each week, why can’t the course be shortened? I had an amazing time, but realistically could have been out and earning a year earlier, with far less debt!’  

(Charlie, History)

2. Unfair UK Fees

There is currently a huge disparity between charges for students from different parts of the country – we need a much fairer UK-wide fees policy:

England:  The most expensive university tuition in the world, with fees up to £9250 a year

Wales:  Fees are up to £9,000, but there are plans to increase maintenance grants or less well-off students

Northern Ireland:  Fees up to £4,030 per year for home students, charges up to £9250 for people from other parts of the UK

Scotland:  No tuition fees for Scottish students. Under European law, students from other EU member states also get free university education in Scotland, but students from elsewhere in the UK may be charged up to £9250.

 ‘I’m Scottish but have been living in England because of my dad’s job. I chose to go to a Scottish university and I have to pay the maximum fees, whereas European students on my course pay nothing. How does that work?’

(Cameron, Economics)

Note:   To classify as a Scottish student, you normally need to have lived in Scotland for the three years before the start of your course.

 ‘Scottish students get free university tuition at Scottish universities – so who pays for that? I have supported my 2 sons through universities in England, and through my taxes, I have effectively paid for a 3rd student to attend a Scottish university! While we’re all part of the UK, we should have one system that’s fair to all.’  

(Tim, Parent of English students)

3. High Maintenance

Tuition fees are not actually the greatest burden, it’s the added cost of funding themselves through university that is crippling poorer students, or their families who may struggle to offer financial support. The replacement of maintenance grants with loans (plus interest) means they are racking up debts of over £57k. In many cases, the loan barely covers rent charges, so students are working long hours alongside their degree to cover their living costs, which cannot be good for their studies or their health. The Government should reintroduce maintenance grants to avoid discriminating against lower socio-economic groups.

4. Punitive Interest

This does not affect lower earners (earning under £25k – from April 2018), who don’t earn enough to pay back their student loan. But interest rates are staggered according to income, and bigger earners face a hefty bill, because they are likely to repay all their debt, and at punitive charges. According to Chris Belfield, author of the 2017 IFS report, interest on student loans is ‘very high compared with current market rates’. The rate charged all through university and for the highest earners after graduation is RPI + 3% (= 6.1% currently), which effectively means:

• The average student owes £5,800 interest before they even leave university
• Higher earners could end up forking out £40,000 in interest payments (around double what they originally borrowed!)

Source: Institute for Fiscal Studies (IFS)

How can it make sense to charge above average rates to the youngest, least affluent members of society? Scrap or cap interest rates!

5. Unaffordable Housing

Your student loan doesn’t affect your credit rating, but it can influence mortgage deals, because lenders take into account monthly outgoings when assessing mortgage applications. So high student debt exacerbates the problem for young people attempting to get on the housing ladder (compounded by the lack of affordable housing in big cities).

‘I had only £6000 remaining on my student loan.
A major lender offered me £87,000 mortgage with my student loan in place,
or £102,000 if I paid off my loan first!’
 
(Beth in Sheffield)
 

Spotlight on Spending

With the rise in tuition fees leaving many students and parents questioning whether they are getting value for money, the revelations of Channel 4’s recent Dispatches programme just added insult to injury. ‘Britain’s University Spending Scandal’ investigation highlighted the huge salaries paid to vice-chancellors and senior management plus their £8m expenses bill over the last two years. Sadly reminiscent of the MPs’ expenses scandal, this calls for greater transparency in universities, just as in politics.

‘This is just a joke at the expense of students and unfortunately it’s rather a sick joke because students are now graduating with average debts of £50,000.’

Lord Adonis

As well as the financial impact, starting adult life saddled with massive debt has psychological issues. The student loan might not be ‘real debt’, but to many it feels like one, and it clearly affects their attitudes and decisions.

7. Don’t Call it ‘Debt’

A student loan is not a real debt in the commercial sense – repayments reflect what you earn not what you borrowed, and any unpaid balance is wiped after 30 years.

So why call it a debt, with all those negative connotations? It should be a more manageable amount of money, considered as an investment in your future; we support Martin Lewis’s campaign to change the student loan to a graduate contribution, which is a far more positive and accurate description.

8. Financial Responsibility Without Financial Knowledge

Leaving the university bubble and becoming financially independent may be daunting; but having responsibility for managing a massive ‘debt’, without financial knowledge is dangerous.

It’s all very well telling young people to be wary of sales culture, watch out for scams, and ask sensible questions so you don’t get ripped off. The problem is they don’t know what are the right questions, they don’t understand what they need to know! – That knowledge comes with life experience, or education.

‘People just assume you know about taxes and other financial stuff, now you’re an adult. I have no idea, no one has ever taught me.’ 

(Lara, English Literature)

 
Basic financial education should be taught in schools/colleges/universities, especially bearing in mind that many parents feel ill-equipped to offer advice:

‘Over a third of parents do not feel competent in advising their children about the simplest of bank accounts let alone more complicated financial matters such as investments or pensions.’

Teach the young to be cash smart – The Independent (Aug 2013)

Concerned or complacent?
Having spoken to final year students, it’s clear that those who don’t really understand the student loan system worry about their debt. And those who do are complacent – they won’t have to pay it back anyway. Neither is a healthy attitude towards debt.

‘I’ll be leaving uni this summer with £54k student debt. I’ve worked out that based on my expected salary levels, 30 years of repayments will barely scratch the surface on the interest, never mind the loan. And then it will be written off, my debt will disappear. So no, I’m not panicking. If you did worry about it you would be permanently depressed, it’s such a massive amount hanging over you.’

(James, Mechanical Engineering)

9. Stress Effects

We have such negative associations with being in debt, and it causes stress even amongst those who understand the true nature of the student loan. Since the 2012 hike in tuition fees, there has been a significant rise in the number of students seeking help and counselling. Mental health charity Mind, say that students’ financial worries and the uncertainty of graduate employment contribute to mental health problems like anxiety and depression.

‘Two in five students say that managing their money at university causes them stress’

Student Resilience: Unite Students Insight Report (2016)

10. Life Choices

Real or not, student debt does affect life choices: which job to take, whether to travel before starting work, whether to rent or move back home…

‘I won’t have the option of moving back home when I graduate. I’m going to have to rent, so I will need a job that pays decent money. That’s got to be a priority for me.’

(Jon, American Studies & History)

‘I would like to take some time out travelling, but how can you pay for that when you already have so much debt?’

(Sean, History)

You have to wonder what will be the longer-term implications for millennials and for the economy? What effect will years of debt have on attitudes towards savings and investments, ability to buy property, putting money into pensions, donating to charity, spending on credit cards?

This American article shows how increased student debt obligations could explain millennials’ aversion to borrowing, with only 1 in 3 carrying plastic (and most of those cards are prepaid or debit rather than credit). Will the UK follow suit?

11. Debt Aversion

There is already evidence that fear of debt is discouraging potential students e.g. in nursing. Since the Government abolished maintenance grants and NHS bursaries in England, students now have to take out loans to fund their university studies, and applications to nursing and midwifery courses dropped by an alarming 23% for the 2017-18 intake.

‘I would not have been able to do my midwifery course without an NHS bursary. I have struggled through the course financially as I have no other financial support. Even with the bursary I have had to work part-time as a nanny. I think it is outrageous that they expect healthcare students to pay for their fees when we are valued members of the NHS workforce.’

(Chloe, qualified midwife)

Rising costs and growing competition from paid degree apprenticeships in the workplace mean universities could risk losing out on promising candidates, if they fail to demonstrate real value.

‘My younger sister has seen me struggling with no money through uni, and she won’t be applying. She and quite a few of her friends are considering degree apprenticeship schemes, where you earn while you learn. The high cost is definitely making people think twice about why they would go to uni and what they’re going to get out of it.’

(Tom, Business Administration)

 

12. Most Loans won’t be Repaid

High student debt leads to financial stress and affects life decisions, but the way the loan system works, means that lower earners will never actually pay back their debt. In fact, now that the repayment threshold has been raised to £25k (from April 2018), a whopping 83% of graduates will not repay in full. Repayment calculations predict that around 48% of the outstanding student loans amount will be written off. So if the government is not even getting the money back, why put young people through psychological hell for nothing?

 
We welcome the review on student loans, but urge the Government to put these points at the top of their agenda:
 

Improve financial education

Introduce basic money management skills as part of the curriculum: budgeting, interest rates, borrowing, saving, tax, banking essentials etc.
 

Control the costs

The slump in nursing applications illustrates why the student funding policy should reflect the fact that higher education is not just an individual/private privilege but also a public good; a better-educated society benefits the public as a whole, and makes the UK more competitive on the world market.

So bring in a fairer UK-wide system, which ensures that university remains accessible to lower socioeconomic groups and does not saddle young people with a huge financial and psychological burden at the start of their working lives: control the costs by reverting to maintenance grants, reducing tuition fees and capping interest rates.

Change the perception 

Student loans should be perceived as an investment in your future and not real ‘debt’ in the commercial sense. So remove the negativity and make it a graduate contribution, staggered according to income (like tax).

And let us have wider diversity in the cost and length of courses, with greater transparency, so students and parents can understand what they are getting for their money.

More info from HelloGrads:

How to choose a bank account – what are the considerations and the questions to ask

What the student loan really means and the important points relating to repaying

Tips to manage your money

Interpretations of the financial news for students/grads

Understanding debt and what to be aware of before you take on debt