£50k Student Loan – a Debt too Far?
English graduates now have the ‘highest student debts in the developed world’ according to a new report from the IFS (Institute for Fiscal Studies)
We look at the stats, the impact on key players, the reality of student loans and the consequences for students and graduates.
Higher tuition fees, increased interest rates and the recent replacement of maintenance grants with loans, will escalate the costs of university for all graduates.
For students in England, average debt will rise to £50,800, making it the highest in the world.
From this autumn, universities will be allowed to raise tuition fees each year in line with inflation. Annual fees are expected to increase from £9,000 to £9,250 this year.
Interest rates on student loans will be raised to 6.1% (around 3% above inflation), which is ‘very high compared with current market rates’ according to Chris Bellfield, author of the IFS report. Interest is charged from the start of university courses, so the average student will have accrued £5,800 interest by the time they graduate. Charges are staggered according to income, but the increased rates mean ‘higher earners will pay interest of £40,000 on top of the amount borrowed.’
More people than ever from lower-income groups are going to university (up 43% since 2009), encouraged by the facility of maintenance support to help with living expenses. However since September 2016, maintenance grants were replaced with maintenance loans, which means the poorest students will come out with the highest debts.
Stats Source: BBC News (2)
£50,800 – Average debt for English students
£5,800 – Amount of interest incurred before graduation
£40,000 – Interest charges for higher earners
£21,000 – Salary you can earn before repaying your student loan
Source: Sky News
Impact on Key Players
Universities – Funding up
The IFS report says that the overall trend has been an increase in university funding; since fees rose to £9,000 in 2012, universities have increased student funding by 25%, to an average of £28,000 per student per degree. (2) Universities minister, Jo Johnson, says this level of funding enables UK universities to maintain their reputation for delivering world-class research and teaching. (1)
Government – Spending less
Diverting costs to students has reduced government spending on higher education, cutting government borrowing by £3bn in the long term. (2)
Graduates & their families – Costs increase
But the burden has passed to graduates, especially high-earners, who will pay heavy interest charges.
The policy changes also put an increased strain on middle-income families. A recent study into student experience by Unite, shows that ‘beyond student loans, half of students report that a family member helps them to finance their time at university.’
Where families are unable to assist, now that maintenance grants have been abolished, students from lower income groups are forced to take on larger debt. ‘Nearly a quarter of students say they use their bank overdrafts for funding.’ (3) The IFS says that the lowest-earning third of graduates are paying 30% more than in 2012, when the higher tuition fees (up to £9000) were introduced. (2)
The IFS think tank warns that continuing along this path of ‘high debts, high interest rates and low repayment rates’ will lead to problems both for ‘graduates and the public finances’
The Reality of Student Loans
A loan of £50,000+ might sound daunting. But far more relevant than the amount of debt you rack up is the amount you actually repay.
A student loan is not like a normal debt
Delayed repayments, their relationship to earnings and the write-off period make the student loan one of the safest, and for some the cheapest, forms of borrowing.
You don’t start repaying until you earn over £21,000.
Unlike commercial loans, repayments are not based on how much you borrowed, but are proportionate to your earnings: you repay 9% of your annual salary over £21,000. Interest rates are also staggered according to earnings. Whilst this does mean high earners could end up paying back far more than they borrowed (because of interest charges), it also means if you don’t earn enough, you don’t need to repay.
And if you haven’t repaid your loan within 30 years, the debt is wiped.
Find out more on Student Loans
£50k Student Loan – a Debt too Far?
We asked graduates and final year students for your views. How does high student debt affect your attitudes and decisions? And will it deter potential students from going to uni? Here’s our response to the IFS report, which we have sent to journalists.
It’s time for a rethink on student loans….
Responsibility without knowledge
One of the most concerning aspects is that graduates are leaving university saddled with a massive ‘debt’, yet little or no financial knowledge to help them manage the situation.
This leaves people vulnerable to making poor financial decisions, with potential negative longer-term consequences.
Three quarters of young adults admit to making regrettable money mistakes in their first years of financial independence, with one in six claiming their debt has ‘spiralled out of control’
Money Advice Service
Students tend to rely on their parents for help and advice (many of whom feel ill-equipped themselves). At best, students will have experience of basic budgeting, getting by on a limited income for 3-4 years, although a recent report by Unite on the student population, suggests that their perceived success at managing finances differs from the reality: ‘Less than half (40%) set a weekly spending limit and more than a quarter (28%) say they often spend more than planned.’
‘I set aside the same amount each month and I budget. I always exceed it but as long as I don’t go too much over, that’s OK.’
(Hamish, Undergrad – Civil Engineering)
Few new graduates will have ever saved for anything major, and most have no clue about tax, or commercial borrowing and the consequences of running up ‘real’ debt.
‘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, Undergrad – English)
Clued up or complacent?
Students who are well informed about how the student loan system works, generally seem less concerned about their debt. And whilst that is well and good, we must hope this does not breed complacency towards commercial borrowing, which can so easily spiral out of control without effective management.
‘You only start repaying your loan when your salary reaches £21k, and when you do start paying it off, you never see that money, it’s taken away before you even get your salary, so I’m not too worried. If it went into my account first, then taking it away would hurt more.‘
(Chloe, Postgrad – Marketing)
‘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, Undergrad – Mechanical Engineering)
Impact on choices
However, many students are worried about their financial situation and know it will shape their decisions.
The Unite report reveals that ‘Two in five students are concerned about being able to repay student debt when they start working after their studies’, which suggests that a high proportion do not view their student debt as an ‘income tax’, but think of it like regular debt.
Even if they understand that their student loan is not ‘real’ debt, many people feel uncomfortable about owing money, and as well as limiting their weekly spend, some think it will influence key choices and diminish their control – pushing them into different roles, or foregoing opportunities and dictating their living situation.
‘People tell you to do something you enjoy and you’ll be happier and more successful in the long run. But actually money is my main motivator. I don’t want to be paying off my loan forever, so I’m going to have to find something that pays well.’
(Tom, Undergrad – Politics & International Relations)
‘I would like to take some time out travelling, but how can you pay for that when you already have so much debt?’
(Sean, Undergrad – History)
We are quick to criticise millenials for delayed adulthood – living with their parents, putting off marriage and home ownership. But for many it’s not a choice but an economic necessity, one exacerbated by student debt.
‘I’ll live at home at least until I get a job, and probably for the first few years when I’m working. It’s the best chance to pay off my debts and save a bit of money to invest in somewhere long-term.’
(Kiran, Postgrad – Maths)
Whilst a student loan does not impact credit rating, it may affect the ability to secure a mortgage, because loan commitments will be taken into account when lenders assess affordability of mortgage repayments. So student debt is adding to the problems of young people getting onto the housing ladder.
‘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)
Those graduates who do not have the luxury of moving home, or a job lined up, face the prospect of racking up further ‘real’ debt immediately.
‘I won’t be able to move back home so I will have to rent, though I’m not sure how I’m going to afford it, I’m already in debt from my student loan. It puts even more pressure on finding a job you like, because you’ve got to keep paying rent, you can’t just quit your job.’
(Jon, Undergrad – American Studies & History)
Contributor to stress
‘Two in five students (40%) indicate that managing their money at university causes them stress’ (3)
It is well known that financial pressures can lead to stress, anxiety and potentially more serious health problems. Given that the mental health of young people is a growing concern, it cannot be helpful that so many are starting adult life burdened with debt, and all its negative connotations.
CALM, the men’s mental health charity, are all too familiar with financial stress, particularly amongst men (probably because of the traditional hunter-gatherer provider programming):
‘Financial issues and having a job are really important to men’s identity.
When these things go wrong, we know the financial problems and relationship break ups are behind many suicides… can really weigh heavily on men if they are not fulfilling the traditional masculine role.’
(Psychotherapist Damien Ridge, Professor of health studies at the University of Westminster – CALMZone)
‘The correlation between those in debt and those with mental health issues is far too strong…this is a growing blight on our society and one we have to tackle.’
Martin Lewis (Money Saving Expert)
Will the student funding policy changes make people think twice about higher education?
This year’s university applications from UK students have fallen by 5%, and apparently this follows a pattern of dips whenever fees are increased. (7)
‘I’m not applying to university, I don’t want to be saddled with years of debt and I don’t feel I can ask my parents to support me.’
(Patrick, talented school leaver, will try alternative ways of pursuing a career in music)
A recent study looking at changes in young people’s attitudes towards student loan debt, found that even though young people regard borrowing money for a degree as a good investment, and they are aware that the income-contingent student loan is not a normal type of loan, debt aversion has increased amongst middle and lower socioeconomic groups and may deter them from going to university. Many do not feel that student loans are affordable, and about a third of the respondents strongly agreed with the statement ‘I would worry a lot if I ever got into debt’. Just as the students in the Unite survey, ‘for these young people the idea that student loans are not really debt does not ring true.’ (8)
As an example, the abolition of maintenance grants and NHS bursaries in England, means students of nursing and other medical subjects now have to take out loans to fund their studies; it is alarming, but perhaps not surprising then, that the latest UCAS figures show applications for nursing courses have dropped by 23% for 2017 entry. (8)
This argues for a student funding policy to reflect the fact that higher education is not just an individual/private privilege but also a public good. Surely a better-educated society benefits the public as a whole, and makes us more competitive on the world market?
Time for a Rethink on Student Loans
Research and our own findings suggest that responsibility for hefty ‘debt’ with little financial knowledge is a risky combination. At one extreme, students and graduates are complacent in the belief that they will barely notice the automatic repayments and probably won’t ever pay it off anyway. At the other extreme, they are stressed about what is looming over them. Neither is a healthy or helpful attitude towards debt and managing money.
Even amongst those with a good understanding of the income-contingent type of loan, many believe ‘being in debt’ will influence key decisions, and for school leavers from lower income groups, debt aversion could deter them from going to university at all.
To those in charge we say…
Change the perception
The student loan is not like a normal debt, so why not get rid of the emotive associations? Even if they are fully aware of the system, many students struggle with a mindset that separates student loan from ‘real’ debt. It acts more like an income tax than a loan, and Martin Lewis (Money Saving Expert) argues it would be more accurate to call it a ‘graduate contribution,’ which makes a good deal of sense, and would alleviate unnecessary stress or fear.
Control the costs
Free university education may be an unworkable utopia, but surely there must be a balance between that and the highest cost in the world! The student funding policy should reflect that higher education is a public good, and therefore ensure it remains accessible to lower socioeconomic groups; this could be achieved by reverting to maintenance grants, controlling tuition fees and capping interest rates just above inflation, so the student loan is at least a relatively cheap debt.
Basic financial education should be part of the school curriculum, or at least in colleges and universities: understanding bank statements and interest rates, budgeting, borrowing, saving and taxation, and where to find financial help and support. We should ensure graduates are in a better position to take control of their finances and make informed decisions about their future.
To students and graduates we say…
It may be a challenge, but it’s not all doom and gloom. Think of your student loan as an investment in your future and not real ‘debt’ in the commercial sense.
Hello Grads is here to help with all things graduate: Get the lowdown on your student loan, discover the first steps to managing your finances, make moving back home work for all the family, become highly employable, and stay positive throughout the journey ahead, plus plenty more!…
Quotes from Hello Grads graduate interviews, & focus groups with final year undergraduates & postgraduates. (Names have been changed to protect the identity of respondents).
(5) CALMzone Masculinity Audit 2016: Research reveals pressures on men (Nov 2016)
Research into the causes of male suicide, carried out by CALM in conjunction with Huffington Post UK