As a new university year begins, many students are arriving for their courses having signed up unwittingly to a lifetime of debt. Meanwhile, the promised land of higher graduate earnings may turn out to be a mirage...

The next mis-selling scandal: why most of today’s students may never clear their debts

WORKERS, OCT 2013 ISSUE

For decades young people have been told that the path to prosperity is to study hard and go to university. But for many of today’s students a university place has become the first step on a ladder of debt that will be with them for the whole of their working lives.

After the degree, the lifetime of debt. Yet few students seem to realise what they are in for.
Photo: sippakorn/sutterstock.com

And it’s not just the students who will be saddled with debt. The way the government has organised the loan system means that its own finances are due to take a big hit from loans that will never be repaid. That doesn’t affect it much now, but in two decades’ time there is likely to be a £100 billion hole in the public finances. No wonder the system been called another Private Finance Initiative.

What today’s new students may not realise is that they are entering a world of painful cost. One teacher, reported the Daily Mail, asked 150 students what the maximum tuition fee was, and they all knew. He then asked what the interest rate was on the loans – and none of them knew. They will soon.

The extent of the pain is detailed in “Squeezing our students?”, a report issued in July by the Intergenerational Foundation (an independent non-party-political charity). Britain’s tuition fees are the highest of any public university system in the world.

To add to the burden, the rates of interest on Britain’s student loans are not just twice as high as the average in the industrialised world (6.6 per cent in July against an average of 3.3 per cent in OECD countries), they are the highest in Western Europe. Only Mexico and the Czech Republic charge higher rates, and their fees are much lower to begin with.

The government even added an extra vindictive twist by linking loan interest rates to the Retail Prices Index (RPI) rather than to the generally lower Consumer Price Index (CPI), which it uses when it calculates increases on benefits. The TUC estimated that just that one-letter change in acronym will cost students thousands of pounds and add years to the time needed to repay their loans.

The result will be a debt that the average student may never pay off. The Foundation’s report explained why.

How the government’s loan repayments work

WARNING: If what follows sounds complicated, it’s because it is. The government has made its loans so complex that most students don’t really know what they are signing up for. According to this year’s Student Money Survey, run by www.savethestudent.org, 55 per cent of them admitted they don’t understand the repayment conditions. All the following details apply to government loans taken out after 2010/2011, when the system was changed.

While students are studying their loans accrue interest set at the Retail Prices Index plus 3 per cent, starting the moment they take out the loan. After graduation the interest falls to RPI, until their income hits £21,000. It then increases to RPI plus 0.15 per cent for every £1,000 of additional income, up to a maximum of RPI plus 3 per cent for an income of £41,000 or more.

Students don’t have to begin repaying their loans until they earn at least £21,000. At that point they pay 9 per cent of everything they earn over that sum – effectively, a graduate tax. But the interest on their loans keeps accumulating. Worse, the repayment rate is calculated on the borrower’s gross income, before income tax and national insurance, and paid out of net income. Anything not repaid after 30 years is written off.

So, for example, a graduate starting work at a typical salary of £22,000 would repay £90 of their loan in their first year. But interest would be accumulating at the rate of RPI plus 0.15 per cent. With RPI at 3.3 per cent (the latest figure) and a typical total loan at the end of graduation for students starting this year of, say, £40,000, this ex-student would be accruing interest of £1,360 a year. So most graduates won’t be paying off any of the debt, just part of the interest. Overall, for a graduate starting work on £22,000, the debt would rise by £1,270 in year one.

Graduates earning less than £21,000 – and even among those who find work straight away many earn less than that in the first couple of years – don’t have to repay anything. But their debt will increase by RPI each year. After 12 months their £40,000 debt will be £41,320.

You’d think higher-earning graduates – and there aren’t that many of them – would find it a lot easier to pay off their loans. Not so. The top interest rate of RPI plus 3 per cent is applied to the whole loan. As the Intergenerational Foundation points out, a law graduate starting at £42,000 a year but owing £40,000 would be repaying £1,890 of the debt. Yet interest will be accruing over the year to the tune of £2,640. Truly, another year older and deeper in debt. ■

What this means is that the average graduate, whose degree is supposed to mean higher wages, will be paying out 9 per cent of their gross income over £21,000 for 30 years – and even so never clearing the debt. According to the Foundation, the average ex-student will have nearly £17,000 still outstanding at the end of 30 years. (After 30 years, the debt is written off.)

Read the small print

It gets worse. Students who take out these exorbitantly expensive loans are signing agreements with small print that allows the government to vary the repayment terms. That means the government can raise interest rates without having to go to parliament for consent.

That particular fact came to light when an investigation published in The Guardian in June revealed government ambitions to privatise the Student Loans Company, which administers the loans. City banker Rothschild, which was advising the government, reckoned the company was not suitably attractive to investors and recommended raising the interest rates as one option.

Of course, for most students the government loans for fees and maintenance won’t actually cover all the costs students have to face – not just fees but rent, subsistence, books, travel etc. So they will have extra loans in the form of overdrafts with banks. With all that burden, no wonder many sixth-formers are thinking twice about going to university.

The government went into the £9,000 fees era knowing that many students would not repay their loans. It estimated that around 30 per cent of the value of the loans would not be repaid. That estimate has crept up, with Vince Cable talking about 34 per cent earlier this year, and the Treasury muttering about 40 per cent.

The £100 billion hole

What does this mean, in real terms? Well, given that student loans will cost the government £12 billion a year by 2015/2016, according to the Office of Budgetary Responsibility, 40 per cent of that will add nearly £5 billion a year to public debt if not repaid. The debt to the student may be wiped off after 30 years, but it remains, transferred to the taxpayer. The Intergenerational Foundation predicted last year that the loans system would add £100 billion to public debt by 2030.The change from giving universities money directly for teaching students to lending the money to students won’t just drag students and the public purse into debt – it costs up to twice as much as well.

Take the money and run

It’s not generally known, but students from the European Union are eligible for student loans on the same basis as students from Britain. So British taxpayers are forking out for loans to students from France, Germany and so on to come here and take up state-funded university places. And for many of them, it’s a completely free ride.

In theory, these EU students have to repay their loans on the same basis as British students. In practice, only just over half of them are repaying the loans as they should, while a third of them don’t even start repaying their debt.

That fact was neatly obscured for a while when minister David Willetts said in parliament on 2 July 2012 that 9 per cent of EU students who had loans from the British government “were considered to be in arrears”.

What Willetts forgot to add, and was buried in a report from the Student Loans Company last year, was that there were a further 33 per cent classified as “not currently repaying – further information being sought” (which is to say, the Student Loans Company had lost track of them). Only 2 per cent of British students fall into that category. ■

It is as if the aim of the system is not to save money, but to ensure that a generation of skilled workers will be in debt before they start work and throughout their working lives. And if public finances 20 years down the line are wrecked, well, so be it. If Britain ends up short of much-needed graduates, so be it. It’s the kind of recklessness that typifies capitalism.

On the face of it, the whole thing seems mad. It’s Wonga-type government, with subprime loans that the borrowers will never be able to repay, and which will lead to a hole in the public finances of £100 billion. To put that in context, it’s about the size of the entire NHS budget in 2011. But the real purpose will be clearer when the Student Loans Company is sold off – there are fortunes to be made for bankers managing large debts.

So it’s not just the students who have been mis-sold. It’s the whole of Britain.

Well, is it worth it?

In return for a lifetime of debt, graduates are promised that they will receive higher wages than non-graduates. Universities Minister David Willetts told the Conservative party conference in Birmingham in 2010, “On average it boosts your earnings by £100,000 over a lifetime.”

Beware figures like £100,000. They are normally too round to be true. That figure is based on a handful of guesses and some figures around average earnings of graduates compared with people who gained two A-levels but did not go to university. There’s actually very little evidence for it.

And even if the figure were true, it’s not good. The average person starting work after school – not even the average for someone with two A-levels – is £14K. So after three years a graduate has debts of around £50K, while the average

non-student has earned at least £42K. Then add in the cost of repaying the loans. Still worth it (in financial terms)?

The truth is that no one has properly analysed the financial benefit of a degree. Universities UK – as you might expect, the body that represents British universities – came up with a lifetime benefit of £160K in 2008. But even its analysis recognised a vast difference between different disciplines, with a lifetime benefit of £341K for dental and medical graduates but just £51.5K for a humanities graduate and £40K for an arts graduate.

Falling numbers

It’s obviously worth taking a degree if you want to become a doctor, a dentist or a lawyer, since you can’t become one without a degree. But otherwise, it’s starting to look as if the sums don’t add up. No wonder last year saw an overall dip in the numbers of students starting courses, despite an increase in the number of overseas students. That has to be dire news for Britain.

It’s a sign of the times that students themselves are not taking this up as an issue for the whole country – and that the labour movement generally is silent. When in July this year Business Secretary Vince Cable suggested scrapping the loans and introducing instead a graduate tax, the National Union of Students welcomed the idea, calling only for a “fair” system.

Aaron Porter, the union’s president, said, “Vince Cable’s support for the principle of a graduate tax is to be welcomed as is his recognition that those who earn most after university should contribute more back as and when they do so.” There seems to be no conception that society must fund higher education because without it Britain will cease to exist.

It’s not about applying reactionary policies “fairly”. If you tax graduates because they earn more, then why not tax A-level or BTEC students for their education? How about a tax to pay for the new apprenticeships? Come to think of it, what about a tax on people who went to nursery school?

The government may be happy about higher education becoming the preserve of the rich and foreign students, but what about the rest of us? This is not just an issue for the National Union of Students, but for all unions. We need people to go to university, to study, to acquire and pass on new knowledge. We cannot rely on importing graduates from abroad. ■