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Everyday Economics: The Student Loan

Student loans are a bit like battels – it’s not real money, is it? It’s a problem for future me, which means that it’s not a problem at all. In fact, it’s almost exactly like an Erasmus grant: free money! Every term! Free tuition! Free food! Free club nights! 

Except that it’s not. The process may take longer to creep up behind you than a termly battels bill, but its inevitability and constancy is the same.  

Student maintenance loans first began in 1990, progressing to tuition loans in 1998 with the intention of opening up access to higher education. Once recorded as conventional loans (loans that are written off decades after they’re accrued), this was contested by the OBR (Office for Budget Responsibility). Indeed, the ONS (Office for National Statistics) found that treating student loans as conventional loans led to no recognition of expected losses, an overestimation of government revenue, a distorted perspective of government accounts, and therefore mismanagement of government expenditure.

The conclusion reached by the ONS and Eurostat was that they should be treated in part as loans, insofar as the forecasted amount that will be paid back, and the rest – which are forecast to be forgiven – as capital transfers. Perhaps the idea of capital transfer is what allows us to wave our hands and hope that our debt will magically disappear, or indeed never appear in the first place. 

But even so, we’re all aware that the money we use to pay our fees and keep us financially afloat is never ours. Although the ever-increasing debt seems a distant otherworldly life, one day this eventuality will attach itself to every tax return, every monthly salary, and we will sigh, watching as 9% of our gross income slowly slips through our fingers.

The 2012/13 fee changes brought in by the Cameron/Clegg coalition certainly altered the impacts of student loans. Students graduate with average debts in excess of £40,000. Previously, graduates without the fee hikes would have hoped to pay off their debt by 30. Now, a more reasonable expectation is our 50s.

Student loans are pervasive not only as students, but for the majority of our working lives. If you ever manage to pay them off, you’re one of few; most people leave university with a huge burden, and that burden persists for 30 years. The burden doesn’t always lessen, either. On top of the face-value loan, we’re charged 3% real interest (additional interest to the RPI, which is currently 2.6%) while undertaking studies and 0-3% after graduation, depending on income.

But what are the financial implications of the reforms, and what impact do these have on social equality and mobility? Only about 5% will repay their debt in full by 40, in comparison to nearly half during the pre-2012 system. It is estimated that graduates will, on average, repay £66,897 – a sharp increase compared to the £32,917 resulting from the old system.

As headache-inducing as it sounds, the new system may have some merits to the increased debt (bear with me here). The lowest-earning graduates, primarily as a result of the higher earnings threshold required before payments can be made, pay back less under the new system. In 2014 prices, the 10% lowest-earning graduates are only expected to repay £3,879 compared with the previous £6,120.

So, amongst those who do indeed opt for student loans, the system is based on the concept of progressive taxes – that as the taxable amount increases, so does the tax paid. The burden of tax is heavily shouldered by higher-earners, resulting in a balancing effect between the two spectrums.

But what of those who never take out a loan in the first place? This totaled 7% of those eligible in 2012/13, and 6% from 2015/16 onwards – a much lower proportion than before the fee changes, in which data from 2000/2001 shows that 22% of those eligible did not take out loans.

No loans equal no debt. Leaving university with clear balance sheets is an unparalleled privilege, one that perpetuates the similar privilege endowed to those who can afford private school – and it is often to this very same circle that the debt-free existence is bestowed. It is without doubt that the decrease in those who will never take out loans is a step in the right direction. 

High-earning graduates from low-income backgrounds will be forced to shoulder the highest level of debt following the shift from maintenance grants to maintenance loans in 2015. The progressive taxation system stumbles a little here; those who never took out loans, and are therefore more likely to be from wealthier backgrounds, are conveniently forgotten.

Despite no significant increase in the uptake of maintenance loans following 2015 changes, the total value of maintenance loans increased annually by 24%, 16% and 12%, largely resulting from students who are forced to take out greater loans in order to cover the loss of grants. The removal of grants impacts those from the lowest income households disproportionately, and when compared side-by-side to those who never require any sort of student loan, it is a glaring injustice.

Is the new system some sort of great equalizer? No, of course it’s not. It widens the gap between the most privileged, who never enter student debt, and those from the lowest-income backgrounds, who spend much of their working life dragging around an implausibly large burden. It is, however, far more progressive than the pre-2012 system, partly due to the higher income threshold and partly due to the parallels it draws with the progressive tax system.

The tuition fee system, whilst absurdly high and resulting in comparatively high payback, is perhaps a more justifiable system. Removing maintenance grants and asking low-income students to enter into a cycle of high debt, which counteracts the increased social mobility that derives from more open access to education, is less so.