3/4 UK Graduates Will Never Repay Student Loans

3/4 UK Graduates Will Never Repay Student Loans

by Tyler Durden

Jul 18, 2017 12:30 AM

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With tuition costs rising more than twice as quickly as consumer prices, a generation of recent college graduates are struggling to strike out on their own, burdened by a $1.4 trillion pile of debt that ineligible to be erased by the tonic of bankruptcy protection. Tuition costs have been blamed for nearly all of the ills facing the millennial generation. The rate at which recent graduates are moving back homme with mom and dad has never been higher, with nearly a third retreating back to the basement as they struggle to jobs with adequate pay. Household formation rate have plummeted as women put of childbirth. Meanwhile, those who have made it out are clustering in popular urba like NYC, San Francisco or DC where they’re spending more than 50% of their income on rent.

There’s no question that US graduates have it rough, but a recent study by the UK-based Institute for Fiscal Studies suggests that students in the UK are facing obstacles that’re even more overwhelming than their peers in the US. As the Financial Times reported earlier this month, Three-quarters of UK university leavers will never pay off their student loans, even if they are still contributing in their 50s.
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This means the UK government will have to write off some or all of the debt taken out by 77% of students because they will not earn enough to repay their loans within 30 years of graduating, according to the study, which was written up in the Financial Times.

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The study amounts to more unwelcome news for the UK college students, who will soon contend with an interest-rate increase of more than a third, to an annualized 6.1%, slated for September. That increase, experts say, is a byproduct of the UK’s decision to leave the European Union - a decision that resulted in a more than 10% drop in the British pound’s value relative to the dollar and euro, according to the Guardian.

“Graduates in England were saddled with the highest student debt in the developed world, the IFS said, adding that the benefits of earlier reforms to the tuition fee system — which took pressure off the lowest-earning students — had been wiped out by subsequent changes such as the replacement of maintenance grants with loans.

The IFS said that because graduates repaid their student loans at 9 per cent of their earnings, above a certain threshold, and over a 30-year period, in many cases interest accrued on their debt too fast for repayments to keep up.

One key finding is that because interest rates on student debt are very high — up to 3 per cent above RPI — the average student accrues £5,800 of interest while studying, meaning they borrow £45,000 but have a debt of £50,800 on the day of graduation.

By contrast, the average debt burden on students in the US is far lower at $36,000 (£27,900), even though the cost of tuition varies far more at US institutions.”

Financial researher researcher Martin Lewis, who runs his own personal-finance website moneysavingexpert.com, says he has been “swamped” by UK graduates terrified by new statements that show their debt spiraling in size after interest is added later this year, he told the Guardian.

“Many graduates are starting to panic. First they look in shock at their student loan statements after noticing interest totalling thousands has been added. Then they read the headline interest rate for the 2017-18 academic year will increase from 4.6% to 6.1%. It’s no surprise I’ve been swamped with people asking if they should be trying to overpay the loans to reduce the interest.”

Counterintuitively, Lewis warns these graduates that there’s little benefit in paying off their loans early thanks to a government program that will pay off the remaining balance after 30 years. Only if the student lands a job earning £40,000 a year on graduation, and then enjoys big pay rises after, should they consider repaying their loan early, says Lewis. Here’s why:

A graduate earning £36,000 a year will repay £40,500 of a £55,000 total student loan over 30 years, said Lewis, at the current repayment rates. The remaining debt will be wiped clean after 30 years. If the same graduate cuts the total £55,000 balance to £45,000 with an overpayment of £10,000, they will still have to repay the same amount of student loan over 30 years, making the overpayment entirely pointless.

Just like in the US, student-loan debt in the UK has been soaring. Its total value rose above £100 billion ($131 billion) for the first time earlier this year, according to figures released by the Student Loans Company.

Lewis says students might as well “rip up their loan statements” and just accept the fact that they will be paying a tax equivalent to 9% of their income above £21,000, thanks to a UK government program ostensibly meant to assuage the student-loan hysteria by spreading around the cost of debt repayments.

"'For most university leavers, the student loan’ is a misnomer – it should be renamed the more accurate term: a ‘graduate contribution’ system. That doesn’t mean it’s cheap or fair, simply that people would make better financial decisions if they focus on the fact they’ll have to pay the equivalent of 9% extra tax above £21,000 for 30 years,' Lewis said.”

As the FT notes, the 2012 reforms, carried out by David Cameron and Nick Clegg, tripled tuition fees to £9,000 and increased average university funding by a quarter. But the majority of the cost rises were borne by richer graduates, resulting in the lowest-earning third of graduates benefiting by an average of £1,500.

Recent reforms have eroded this advantage: cutting maintenance grants has reduced the government deficit but meant students from low-income families are graduating with the highest debt levels, often over £57,000.

Laura van der Erve, one of the report’s authors, said told the FT that universities are “undoubtedly” better off under the current system than they were before the 2012 reforms. But she warned that the changes had shifted incentives towards institutions offering low-cost arts and humanities courses, which now attract 47 per cent more income per student than they did in 2011. By contrast, the highest-cost subjects only attract 6 per cent_more income. “This does not sit comfortably with the government’s intention to promote typically high-cost [science, technology, engineering and maths] subjects,” she said.

Intensifying student-debt burdens have been blamed for helping Labour leader Jeremy Corbyn won support from a swath of young voters on the back of his election promise to abolish £9,250 annual tuition fees altogether.

One Conservative heavyweight noted the most pressing issue related to college costs: The question of whether these costly educations represent an adequate value for students. One study in the US revealed that graduates at large state flagship universities are often leaving college with worse cognitive skills than they had upon enrolling.

“Damian Green, the Conservatives’ first secretary of state, told the FT earlier this month that the debt burden on young people was “clearly a huge issue” and something his party would have to address. “I think in the long term we’ve got to show that [students] are getting value for the money,” he said.

Even liberal politicians criticized the government’s plan to focus student debt reforms on percentages and interest rates.

“Responding to the research Sarah Stevens, head of policy at the Russell Group, said that increased undergraduate fees have been “crucial” to universities at a time of cuts to government teaching grants. She suggested that in order to make higher education more affordable for students, ministers should address concerns over the interest rates applied to loans.

Nick Hillman, director of the Higher Education Policy Institute, agreed that issues such as interest rates, repayment thresholds and the period allowed for repayment affect graduates far more than the “sticker price” of university courses, which receive far more political attention.

‘The debate about fee levels is a bit of a red herring because what matters is what you are paying back later,’ he said. ‘The point at which you feel it in your pocket is when you’re in your 30s, with a mortgage and childcare costs, and 9 per cent of your salary above a certain threshold is going to pay back your student loan.’”

Judging by the IFS report, and other the recent warnings about the metastasizing consumer-debt crisis issued by the BOE, most contemporary students and recent graduates will be feeling this burden until they’re just about ready to retire. Let’s hope, for their sakes, that they can find some way to afford it.