2.1, 2.2, too much debt: Student loans are turning up the heat on the economy

28^th July 2014

ResPublica's Jessica Trevellick highlights the damage to the economy and individuals of overbearing student debt.

We’re all glad to see the summer and none more so than the university graduates of 2014; mortarboards on heads and scrolls in hand, for them it marks the end of struggling to stay awake in lectures, of facing the horror of a blank page perilously close to an essay deadline, of sitting another exam. However, at risk of upsetting these scores of fresh and hopeful faces (and, perhaps more frighteningly, their proud parents), it might not be all sunshine and smiles. The Wall Street Journal congratulated the 2014 graduating class in the US on being the most indebted ever. In the UK, this dubious honour will belong to next year’s cohort. The majority of 2015 graduates will have started their three year BA/BSc studies in the autumn of 2012 when universities began charging the maximum £9000 per year fees. Prior to this, the cap was set at £3,375.

So why should you care? It’s their debt, not yours. Graduates generally out-earn those without higher education qualifications over their career and repayment does not start until they earn above the £21,000 threshold. If only it were that simple. It has been argued that student debt is holding back the overall US economy. Data shows that just 22% of 27 to 30 year-olds have mortgages compared to around 30% in 2008 with the sharpest decline among those who also have student loans. It makes sense that those making large monthly repayments on a student debt are less able and more reluctant to take on further borrowing. A study by the Sutton Trust and Institute for Fiscal Studies has already hinted at the potential advent of a similar situation in the UK, noting that the size of the debt and the structure for its repayment under the new post-2012 regime will mean that extra financial pressure will be exerted on graduates at times in their lives when family costs are likely to be at a peak.

Student debt is by no means the biggest problem for the UK mortgage market and young buyers trying to get on the property ladder. They already face a myriad of challenges: the housing shortage; the base rate set to rise; more stringent lending criteria brought in by the Mortgage Market Review; though the equity loan scheme has been extended to 2020, the phasing out of Help to Buy; wages not rising in line with house price increases; and, especially in the nation’s metropolises, already excessively high house prices. However, housing is a very important part of our economy and all factors potentially impacting on it should be duly considered. A weak housing market will hinder financial sector recovery and growth by reducing loan activity, and also negatively impacting on businesses that derive revenue from this sector, for example, manufacturers and retailers of household appliances and furnishings. Furthermore, there are wider social implications of a generation forced to continue living at home or flatshare, such as delaying starting a family.

So, what can be done? Our universities need adequate funding if they are to be able to continue to offer a high-standard of education but leaving this to the public purse has been found to be simply unsustainable so any reduction in fees would need to be financed from elsewhere. US colleges rely heavily on endowments from successful alumni. Is this something that we could and should see more of in the UK? Recent events at one of our oldest and most prestigious establishments, the University of Cambridge, would suggest so. It has recruited Alison Traub, credited with raising $3bn at the University of Virginia, as part of a campaign to attract investment from former students and philanthropists. This is one way to source the money that universities need but critics say that it brings its own problems; a degree becomes an investment on which one expects a return, destroying learning for learning’s sake, and some argue that it engenders nepotism, saying that donations to US colleges “buy” places so that generations of families attend the same institutions, undermining the values of meritocracy and social mobility that university is supposed to promote.

Another possible solution is to allow students to work off their debts during the holidays or immediately after graduation by enrolling in a ‘National Citizen Service’. Graduates with the relevant knowledge and skills could have a proportion of their loan written-off in exchange for working in a programme which would see them fill jobs for which there is currently a shortage before commencing on their chosen career path. New graduates could provide care for the elderly or, akin to the already existing TeachFirst scheme, teach in underperforming schools. The AmeriCorps scheme in the US places graduates in public agencies or community organisations. The federal government pays the interest on qualifying student loans for the year of service and a $5,550 lump sum that can be used to pay off part of the loan is awarded upon completion.

Another idea might be to allow student loan debt to be paid off using part of a mortgage advance; for a £300,000 property with a 40% deposit, instead of creating a mortgage of £180,000, the bank would advance £200,000 to cover the purchase price of the house and repayment of £20,000 outstanding student loan debt. With the interest rate on student loans currently set at 3% above inflation (so roughly 5%) and first time buyer mortgage rates currently lower than this (HSBC are offering a 1.59% 2 year fixed rate deal based on 60% LTV), graduates would save on interest payable and have the added convenience of a single consolidated monthly repayment, rather than having two separate ones to the SLC and their mortgage provider, simplifying budgeting. Even when factoring in that the Bank of England base rate is destined to go just one way from its long-standing historic low and that this increase will slow inflation, graduates are still likely to make some saving. The SLC would also stand to benefit; the aforementioned study found that nearly 75% would have some part of their loan written off having failed to repay within 30 years.

There is no obvious solution but it is clear that the debate on student loans, particularly in light of an upcoming general election, is one in which we should all take some interest.