This is a guest blog post written by Mark Borthwick. You can contact him via: MDBorthwick@gmail.com

This piece refers to the English student loan system and when it refers to the government it is referring to the government at Westminster and not at Holyrood. 

Extract

This blog post aims to illustrate how student loans work since their overhaul in 2012, and provide an outline of the demographic challenges presented by the proposed and implied changes to the student loan system over the coming years.

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I remember sitting on a bench with my art teacher during a presentation on Higher Education. It was 2011. He wasn’t meant to be there but his daughter was in year 12 so, like all of us, he was morbidly fascinated by the government’s new plan for the Student Loans system. At the front of the gym an outreach officer from the University of Manchester stands beside a slide scantily adorned with the available information; at this point not much was known for sure. My teacher’s hand shoots up. In it is a scrap of paper.

“I’ve just done some sums,” he said, “and it seems clear that the money required to pay back these loans is well above what graduates can expect to earn.”

“You’re totally correct”, the presenter replied, “and the government must realize: very few people are ever going to be able to pay back even the interest on these loans.”

Student loan repayments are tied to your earnings, rather than the size of your debt. This means that graduates will pay back 9% of their earnings over £21k per annum. We were told it would be impossible to default on this debt, as repayments halt if one’s income drops below £21k. When the debtor reaches age 65 all will be forgiven. And because the debt is held by the government these promises are guaranteed to be kept. It was clear the deal was crooked, that the government could never recover a majority of the money loaned. Like many young people in the jobless recession I didn’t see an alternative. I took out a loan, my teacher’s children took out loans. In the four years since the following things have become clear:

1. Loans repayments will be a significant financial burden for the vast majority of students, for their entire lives.
2. Existing student loans are set to become increasingly burdensome, in breach of government promises
3. The loan burden on future students will increase in a way which will disproportionately affect the poor.

I will address each of these in turn.

1. Loans repayments will be a significant financial burden for the vast majority of students, for their entire lives.

When the tuition fees were increased from £3,000 to £9,000 per annum, the government also increased the interest on these loans, from RPI to RPI+3%. I graduated from a Scottish University with £45,531 of student debt, and under the new system my debt accumulates 4.6% of interest every year, which works out to be £2,094. In order to pay back the interest alone, a student with my debt will have to earn £44,500 immediately upon graduating. I’ll spare you the rundown of my sums, but assuming a career of 45 years, in order to have paid back the student loan in full by the age of retirement, a student with my debt will have to have a mean wage of £55,500 across their career. This assumes that they have a starting salary of at least £44.5k — if not, the compound interest on these loans will double the amount owed in as little as 15 years.

How feasible is it for a graduate to earn these sums? HM Revenue & Customs puts the median income in the UK at £21,000. In 2013 the Association of Graduate Recruiters listed the median starting wage for graduates at £26,500. However Charlie Ball, deputy director of research at the Higher Education Careers Services Unit, published a response to this data in the Guardian which suggested that the AGR only surveyed 197 large London-based finance companies, and that “most people” start earning “less than £20,000”.[i] In my own experience as a graduate from a Russell Group University I know only one graduate who went into a position earning above 20k.

If one was to get a salaried government job as a Teacher, a position which requires a degree, and takes the salary listed on education.gov[ii]: starting at £22,467, and rising to £33,160 after ten years of teaching, they would be earning more than most graduates and well above the national median[iii], and yet they would not be making a dent on the interest on their student loan. In fact it will have increased in size by 75% by the time they are 40. If they are lucky enough to become a headteacher by age 40, and earn the princely sum of £108,283 per annum (putting them in the top 2% of earners[iv]), they will be spending £7,000 a year to service their debt. If the headteacher has taken a career break, or allowed their debt to compound while earning a more conventional wage, they will be paying this indefinitely.

If they opted to take a PGCE under the new postgraduate loan, designed to increase access to Masters Degrees in an academic environment bereft of funding and a job market saturated with graduates, their repayments rise by 6%. This means they will be servicing their debt to the tune of £13,000 per annum, and will still have not paid it back by the time they retire. The brute fact is that the interest on student loans accumulates at a rate which far outstrips graduate earnings and wage increases, meaning that all but a highly affluent minority will be trapped in an interest spiral, paying into this debt for their whole working lives.

2. Existing student loans are set to become increasingly burdensome, in breach of government promises

The Sutton Trust, an independent think-tank which aims to ‘improve social mobility through education’, states that the average student debt upon graduation in the new regime is “over £44,000”[v]. Rest of UK students studying in Scotland must fund an extra year of study, and can incur additional debt of up to £13,000. “English students now face some of the highest tuition fees in the world,” the Sutton trust reports, “and the highest average debts at graduation”. The Sutton Trusts’ study notes that while UK students are saddled with significantly more debt than their American counterparts, their debt is less burdensome, because it is income contingent and held by the state.

However, student loan repayments are no longer income contingent. In 2015 the student loans were ‘uncoupled from earnings’, meaning that the repayment threshold will remain at £21,000 in spite of inflation, despite interest on the loans increasing in line with the RPI.[vi] In real terms, within five years the repayment threshold will be lower than the £17,500 threshold the new regime replaced. This means that despite promises made to young people, and in total scorn of the contract they signed with their government, the percentage of the graduate wage packet paid taken to service student debt in real terms will increase month upon month until the repayment threshold is unfrozen, perhaps indefinitely.  

Additionally, this week the government took the first steps to removing student loans from state ownership. Financially speaking this doesn’t come as a surprise, because as my art teacher calculated in five minutes on the back of a napkin, the new loan system generates less revenue than the old student loan system.[vii] It’s too soon to say what the consequences of selling off the loan book will be, but we can make some (expensively) educated guesses.

While the government promises the terms and conditions of the loan will remain the same, the freezing of the repayment threshold shows that they are prepared to break promises (and contracts!) retroactively in response to meagre financial pressures. One way to battle this financial pressure is to trade smarter, click here to know more on how to save and grow your money.  The student loan book will now be subject to huge financial pressures, as its investors will be seeking to make a profit from their purchase, according to motley fool everlasting portfolio experts. Since it is a loan which is engineered to be impossible for most people to pay back, it seems likely that the government will have made concessions to make it a marketable asset. It is not unlikely that one such concession is that repayment rates will change in the future. Any slowing of economic growth will affect wages, and in turn the rate of repayment. This will offer a huge incentive for increasing the repayment proportion.   

The worst-case scenario is that, at some point in our lifetimes, the owners of our debt are allowed to determine their own rate of repayment, allowing them to bankrupt those who default on their student debt. In the United States, where loans are held in a private equity system and loan defaults are possible, 27% of graduates report struggling to buy daily necessities because of their student loans repayments. 43% are forced to delay starting a family, and 73% are unable to save for retirement.[viii] Demos.org calculates that the Average American pays back more than four times the cost of their loan over their lifetime.[ix] All of this is on debt which is smaller than the average graduate under the new UK debt regime.

And it’s only going to get worse as students are forced to incur increasing amount of debt to access higher education.

3. The loan burden on future students will increase in a way which will disproportionately affect the poor.

The replacement of maintenance grants with loans, announced this year, will compound the debt of future graduates. In a programme ending this year, means-tested bursaries are provided to students from low-income families. I want to emphasize that my £45,531 debt is modest compared with the debt of the graduates of tomorrow. Because of my parents’ financial situation, I gained £14,652 of assistance, a sum which will be absorbed into the debt of future graduates. These numbers may seem colossal, but when £36,000 worth of tuition is subtracted, a student with these bursaries and loans is provided £503 per month on which to live, the lion’s share of which will go on rent. The Institute for Fiscal Studies predicts that the replacement of maintenance grants with loans will leave the poorest students enrolling in University from 2016 with a debt of £53,000 after a three-year course, which I extrapolate to be £66,250 in Scotland.

Tuition fees are also on the rise, as the new Teaching Excellent Framework permits high-performing Universities to charge an increased amount for tuition. Several universities in the UK are now charging £9,250 per year — an increase above the rate of inflation. The National Union of Students is boycotting the TEF[x], as allowing the best performing universities to raise their tuition fees will price students from low-income households out of getting the most prestigious degrees. It will also punish struggling institutions; coupled with spending cuts in the sector; the worst-performing universities will be deprived of the capital required to improve.

All of this increasingly makes higher education inaccessible for UK students. Many find their loans are insufficient to accommodate the rising cost of living. I paid £18,110 in rent alone while at Edinburgh, a city which reported a rent increase of 8.8% this year. The University of Edinburgh’s new finance information estimates the upper end of the rent range at £36,000.[xi]

If students are extremely lucky they might be able to find work during term time and over the summers, however young people are three times more likely to be unemployed than any other demographic in the country,[xii]  disabled students are excluded from taking on much available work, women earn less[xiii], and BAME students are less likely to become employed[xiv]. Students who work to live will also be deprived of the industrial experience which is increasingly required to land graduate positions, which is frequently unpaid.

There has been a rapid increase in the number of payday loans aimed at students, and a 2015 surveys put the number of students who use payday loan services as high as 27%.[xv] The spiralling debt resulting from payday loans, which are targeted at those with no other financial options and accumulate interest at a max of 0.8% per day is debilitating and well documented. It doesn’t surprise me that pay day loan companies target students. Students are economically vulnerable, and are accustomed to being mis-sold loans which trap them in an interest spiral.

Conclusion

The post-2012 student debt regime punishes the poor. These loans have been engineered so they can never be repaid. At best this will significantly prevent the accumulation of wealth, though as the loans are deregulated it is increasing likely that this debt will be financially disastrous for graduates. Student debt is set to increase as both the cost of living and tuition costs rise. Student loans already fail to cover the cost of studying, forcing poor students into increasingly burdensome economic situations. The government freely imposes retroactive changes on the loan conditions. According to bankruptcy attorney Cibik Law, P.C.,  if they achieve their goal of selling off student loans as an asset and subsequently allow the loans to become deregulated, British graduates will face a bankruptcy crisis and was asked for an automatic stay which is set to dwarf that which is beginning to appear in the US, where 17% of students have defaulted on their debt in the past year.[xvi]

There are students in our academic community for whom £66,250 can be paid out of pocket. They will take home 9-15% more, and work in the most profitable industries because they can afford to garner unpaid experience. In years to come such students will also achieve the most prestigious degrees as performance-based tuition prices students from low-income backgrounds out of accessing the best universities. The dark heart of this is that the privatization of debt means the interest paid on these static loans is a tax on the poor, which is being paid into private hands rather than being fed back into the education system at any level. Not only will poor students be occluded from accessing an elite education, they will be paying the elite thousands of pounds every year for their entire lives for the privilege of a second-class degree.

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[i] https://www.theguardian.com/careers/reality-check-graduate-salary

[ii] https://getintoteaching.education.gov.uk/funding-and-salary/teacher-salaries

[iii] https://www.gov.uk/government/collections/personal-income-by-tax-year

[iv] https://www.gov.uk/government/statistics/percentile-points-from-1-to-99-for-total-income-before-and-after-tax

[v] http://www.suttontrust.com/researcharchive/degrees-of-debt/

[vi] https://www.theguardian.com/education/2015/nov/25/osborne-student-loan-tuition-fees-university-higher-education-autumn-statement

[vii] https://www.theguardian.com/education/2014/mar/21/student-fees-policy-costing-more

[viii] http://www.asa.org/site/assets/files/3793/life_delayed.pdf

[ix] http://www.demos.org/what-cost-how-student-debt-reduces-lifetime-wealth

[x] https://www.nus.org.uk/en/take-action/education/boycott-the-national-student-survey/

[xi] http://www.ed.ac.uk/studying/international/finance/cost-of-living

[xii] https://www.theguardian.com/society/2015/feb/22/youth-unemployment-jobless-figure

[xiii] http://www.fawcettsociety.org.uk/policy-research/the-gender-pay-gap/

[xiv] https://www.theguardian.com/education/2016/jan/30/ethnic-minority-graduates-earn-less-struggle-to-build-careers

[xv] http://www.independent.co.uk/student/news/student-debt-number-of-uk-university-students-taking-out-payday-loans-much-higher-than-previously-10390124.html

[xvi] https://www.wsj.com/articles/about-7-million-americans-havent-paid-federal-student-loans-in-at-least-a-year-1440175645