Author Mark Richards

A report from the Institute for Fiscal Studies has said that students are now on course to graduate with debts of more than £50,000. How does the student loan system work? Is it sustainable – and is there anyone who really benefits from it?

“Education, education, and education” Tony Blair famously said in 1996. Twenty-one years later, today’s university students might respond equally simply: ‘Debt, debt, and more debt.’

My eldest son has just graduated. After four years at university, he has a Master’s degree in Engineering. He has also just received a statement from the Student Loans Company, showing a total debt of £57,117. That is made up of four years’ fees at £9,000 a year, maintenance loans and interest.

Before you counter that the figure is excessive – that he did four years, not the standard three years – new research from the Institute of Fiscal Studies has shown that students in England are now on course to graduate with an average debt of £50,800. Even more significantly, it is students from the poorest backgrounds who are accruing the largest amount of debt. With more loans available to support them, these students are likely to graduate with debts in excess of £57,000.

Student Loan basics

Let us take a look at the nuts and bolts of student loans in more detail.

What do student loans cover?

For the 2017/18 academic year, student loans cover tuition fees of up to £9,250 a year, and maintenance fees of up to £8,430 for students living away from home, outside London. For students in London, this figure can rise to £11,002.

How is interest charged?

Interest is charged from the day the first payment is made until the loan is repaid and is added to the sum outstanding every month. While a student is studying, and up to the April after the course finishes interest is charge at RPI plus 3%. For 2016/17 this figure was 4.6%, but with inflation having risen, it will now be 6.1% for 2017/18. From the April after the course finishes the rate of interest depends on salary: RPI where the income is £21,000 or less, rising on a sliding scale to RPI plus 3% for incomes in excess of £41,000. It is important to note that if a student does not provide information that is requested by the Student Loan Company – for example, evidence that they are no longer working – then the ‘penalty rate’ of RPI + 3% is immediately applied.

How do you make repayments?

Repayments are made as soon as a student is earning more than £21,000 a year and then paid at 9% of all income above this figure. So if a student is earning £30,000 they will pay 9% of £9,000. That is £810 a year or £67 per month. But if the student has a debt of say, £50,000 then there is no way that the loan will reduce: interest will be approximately £3,000 a year and the student will be more than £2,000 deeper in debt at the end of the year than he was at the beginning.

Are Student Loan debts ever written off?

Yes – the general rule is 30 years from the first April after graduation. So if you graduate in June 2017, your student loan will be written off in April 2048. The IFS is currently estimating that around 75% of student loans will never be repaid in full, effectively making the 9% of earnings charged above £21,000 much more a ‘graduate tax’ than a loan repayment.

Why are students from poorer backgrounds graduating with more debt?

Simply put, because previously means-tested grants have now become loans. With less parental support available to them, students from poorer backgrounds have been more reliant on loans to cover residential and living expenses, and have therefore accrued more debt.

Why are students from poorer backgrounds graduating with more debt?

Should student loans be scrapped?

Now we come to the heart of the matter. When you see figures like that it is not hard to understand why Jeremy Corbyn’s pledge to abolish tuition fees met such a rapturous response in the election campaign – not just from students but from their parents as well – and why so many university towns swung sharply to Labour. Senior Conservative (and close ally of Theresa May) Damian Green last week recognised that tuition fees had become ‘a big issue,’ and called on universities to provide value for money.

Labour education spokesman Gordon Marsden said,

“Student debt continues to rise and – with no end in sight – students in the UK will now graduate with a shocking average of over £50,000 in debt.”

The IFS says that scrapping tuition fees would cost £11bn per year. But it also warns that continuing on the current path of “high debts, high-interest rates and low repayment rates” will ultimately mean problems both “for graduates and for the public finances.”

Has anyone benefited from the student loan system?

Yes. The IFS report says there have been two main beneficiaries from the current fee system – the universities, and the government finances. Universities have increased funding-per-student by 25% since fees rose to £9,000: small wonder that some University vice-chancellors are earning salaries of up to £400,000 a year. Meanwhile, the Government has converted grants to loans and students are paying a rate of interest described as “very high” by IFS report author Chris Belfield. What’s not to like?

Could a student loan become the next misselling scandal?

The Government and the Financial Conduct Authority are apparently concerned right now about irresponsible lending on car loans. Two months ago we wrote about credit card debt – specifically about how little the capital outstanding was reduced if only minimum payments were made. But as many commentators have pointed out, here is the Government promoting a scheme where you can make the statutory, contractual repayments and yet still see your debt increase. Had the Student Loans scheme been introduced by a private company it is very easy to see the Financial Conduct Authority announcing a speedy and comprehensive crackdown.

As we noted above, most graduates will never repay their student loan. Even a graduate earning £50,000 will still see their debts increasing, but will in effect be paying a ‘graduate tax’ of £217.50 per month. When student loans were first mooted, mortgage lenders said that they would not be taken into account when calculating mortgage ‘affordability.’ But it is very difficult to see how that stance can be maintained: debt repayments of £217.50 are significant by any standards and must impact the ability to repay a mortgage.

As I have three children I should declare an interest: but it seems entirely wrong that you can comply with all the terms of a loan, making the payments set out in the contract and still see the capital outstanding increase. In the long term, the student loans system is simply not sustainable. In the short term, it looks like a scheme Shylock would have been proud of: the Government is certainly taking its pound of flesh from today’s graduates…