While many look back fondly on their days at school or university – sports competitions, days out, free time and friends – it is all too easy to overlook the implications of simply jumping on the bandwagon all your peers are and rushing into higher education. Before you take out that student loan for university it may well pay dividends down the line to assess how much of your future income will be eaten away by interest repayments without putting a dent on the initial loan toward tuition fees or maintenance loans. Undertaking a student loan seems like just the next piece in the puzzle as you progress from school to higher education. However, despite the euphoria and trepidation that comes with an unfamiliar environment and all the challenges that may bring, there may be one further consideration often overlooked – the repayments impact on future financial security in undertaking a student loan.
The British Government officially outsourced student financing to the private Student Loans Company in 2015, meaning any repayments of loans go directly to this company and not the government. The government are simply the guarantor, and therein lies the issue. Shifting the current roster of students enrolled and incoming from a public asset into private hands means that the money we thought we were borrowing from the Government to pay for our ‘public’ university education flows straight to private financial institutions.
Hindsight, freedom of information requests and parliamentary records indicated this was years in the making, albeit side-tracked in PMQ’s, debates and interviews. The failure of the Liberal Democrats while in coalition government to demand the concessions of David Cameron to prevent tuition fees rising from £3000 to £9000 was pegged on Nick Clegg – even though the media slant forced him into a Catch-22.
As David Cameron reiterated time and again “we are all in this together”, however, there is a clear divide between those who have the means to pay higher education upfront and those who must bear the burden of debt. The evidence once more sheds light on that Orwellian vision “some are more equal than others”.
Now, every student loan that was backed by the UK government, including the pre-1998 loan book, is in private hands and tied to debt collection companies and the Student Loans Company's specified interest rates. A confidential report fell into the hands of the Guardian and False Economy which was a research plan of how the coalition government of Tories and Lib Dems could privatise the pre-2012 loan book.
Politicians have and continue to dismiss the sale as merely another step in the process of bringing down the national debt with “austerity” to which “no one is immune”. Alongside other public assets which have undergone privatisation, like the Royal Mail and NHS, the student loan book will undoubtedly prove to hold adverse long-term consequences.
The Retail Price Index is predicted to reach 3.6% by first quarter of 2018, rising from 3.1% recorded from this March which translates into the bench for September on. The student loans company currently charges RPI + 3% on a sliding scale of income, the rate of interest accumulating on loans will be at 6.1% by September and 6.6% by Q1 2018, all other things being equal, such as the SLC not deciding to raise the repayment rates beyond 3% over and above the RPI. On previously undertaken loans this will remain capped, for instance 1.25 per cent on those before 2012.
There is a clear divide between those who have the means to pay higher education upfront and those who must bear the burden of debt.
What is all the fuss about?
The interest accumulated on £31,000 in the year after leaving Higher Education will be £2046. The loan repayments set at 9% of your salary will mean that a graduate needs to earn £42,000 to cover the interest gathered on the tuition fees alone. This is not including maintenance loans for accommodation, books and food. The reduction in fees will be £24 for a high-flying graduate who comes straight into the workplace at £42,000. Given the average median income in the whole UK lies at £27,000 this year. Ouch.
The burden of the debt may not be fully appreciable in the short-term context, but added up over the 30 years for both partners in a couple earning the median salary of £27,000 each, whom both took out only tuition fees for a standard 3 year degree at £9000 per annum will end up paying back together given the anticipated rates for 2018 onwards in the region of £43,000 at current rates over 30 years, holding salaries relatively constant. After 30 years from leaving study, the loan is cleared for them.
Meanwhile, however, the rate of interest repayments will have gathered a further £180,000 over the full period, even discounting the £43,000 'repaid'. Although these figures retain their accuracy under expectations the prevailing UK median wage rate remains stagnant throughout the period, the relative proportions of repayments will remain constant as wages track, yet lag behind, RPI + 3%. This means that the couple will expect to reduce the £180,000 with higher payments, yet still have a large debt after 30 years.
The Office for National Statistics tells us the median was £8,565 in 1987, and stands at £27,000 today, a rise of 215 per cent. Were the income to rise over the next 30 years for a newly graduating student, it would stand at £58,050 in 2047. (Yet, the likelihood of wage inflation to keep pace with the rate of CPI is debatable. One only need compare the next 30 years with the former as having been one of the greatest in raising the living standards of the general population with innovation and inventions changing the way we live and interact). This leaves the relevance of wage inflation largely superfluous as the repayments remain at 9% p.a. and the rate of interest accumulation at RPI + 3% rendering higher repayments tied to median incomes rising will still dwindle below the rate of interest. Therefore, the overall arrears are not being depleted as students had been led to believe when undertaking the commitment.
Implications of the 30-year cap
The current cap of 30 years from graduation a student is obliged to continue paying off their student loan has changeable terms written into the contracts. This leaves graduates as potentially vulnerable to coming under commitment to pay off their loans until they retire.
Student Loans are not currently defaulting here in the UK at the concerning levels in the USA since we have only recently witnessed the significant rises in tuition fees, stagnations in real household income, and are about to feel the pinch from interest rate hikes in the wake of Brexit and also to accommodate for the Eastern and Southern European students higher default rates due to lower incomes in those countries. Bearing these factors into consideration mean that this isn't the kind of issue that is likely to cause a new recession or a fiscal crisis for the Bank of England to tackle in the near future. But the economic impacts - such as first home ownership age is ever rising, worse credit ratings carving slices off the middle classes alongside delaying marriage and having children later in life - are already being felt, and they could persist for some years.
Many students will spend most of their lives paying off a student loan for an education that should be free, and a certificate that gets outdated within a few years. Top employers will simply just opt for hiring another student who is a fresh rosy faced new graduate. Social mobility in the UK has decreased, as reflected in recent statistics of university attendance. 49 per cent of the poorest will apply to university and get in as opposed to 77 per cent of the richest. Mapped against the strong underlying link between a lack of social mobility and inequality, only Portugal is more unequal and bearing lower social mobility in the developed world.
In addition to which, the generational trends between sons expected to earn similar Real Wages as their fathers before them. The Rowntree Foundation has found that the top 1% of society earn more now than the rest as a slice of national income shared than any time since 1930. Therefore, everyone who attends university today who does not have parents or grandparents to pay their tuition fees and maintenance, faces a disadvantage through higher fees and costs. Atop of which, these students are unlikely to be in the 1 per cent of top earning families in the country, and so, in all likelihood earn a smaller slice of the national income pie than their parents, and their parents before them in real terms. An intergenerational crisis is unfurling, with the high rates of attendance on courses which charge unserviceable fees not justifying the investment with guarantees of a return in income or employment afterwards and falling or stagnant real wages since the 1980s reflectively in the UK. Ultimately, the problem is compounding in preventing social mobility between classes in the majority of cases. Naturally, there are exceptions based on affirmative action, but these are few and far in between when one considers the holistic circumstances.
These issues exist alongside the burden of taxes rising proportional to their incomes and high costs of living for renting in cities such as London where they may venture in order to find the best paid jobs. Added to this, the dilemma that poor credit of not being able take out other loans if the student debt is not currently being amortized, renders them barred from taking out serviceable interest loans for cars, homes or even to start up small businesses. As Daniel Townsend, a satirical politico commentary from Nova Scotia commented, “Students will be trapped in a prison of financial enslavement”.
Is there a choice?
While many of us, students, signed our lives away on forms with small print in T&C’s from SLC to borrow money from the government to study at university, we arguably did provide permission for changeable loan terms. Thereby, we have unwittingly become bound in by codified law to continue paying, and we had the “option” to not sign the form each year of university. Ergo, therein lies the Catch-22 in that had we not signed the form, most of us would not have been able to afford to attend. Accordingly, there was not a fair choice to be made.
Worse for the taxpayer
The double whammy becomes apparent when you bear into consideration financial ‘synthetic hedges’, whereby the UK taxpayer is the effective guarantor for all loans the government so chooses to administer – including EU nationals hailing from countries with decidedly lower average incomes than domestically. The chances of repayment, including severance of funding ties and association a hard-Brexit may leave, will render chasing down defaulters unfeasible. Meanwhile, the private SLC leapt at the ‘sweeteners’ offered to potential buyers.
Government mismanagement is rife
The previous pre-1998 loan book for student loans was worth £900 million and yet ended up in the hands of private debt collectors for a miserly £160 million. The money miss-management and conservative schemes are wreaking havoc with the long-term finances of this nation.
An intergenerational crisis is unfurling, with the high rates of attendance on courses which charge unserviceable fees not justifying the investment with guarantees of a return in income or employment afterwards.
Student loans have been a fixed income return for the government as a public asset. And yet, the underlying concerns over the short-term privatisation were likened to Gordon Brown, while Chancellor of the Exchequer, selling off swathes of the UK’s gold bullion reserves undercutting true market prices, costing the UK taxpayer £7 billion. The British government has sacrificed future income in selling off our loans, comparable to the squandered long term investment potential Britain’s gold bullion reserves once held.
While selling off public assets to the highest bidder in the private arena constitutes part of a wider political agenda, it sadly reflects political postulating gone awry. Strategies to reduce public sector net borrowing and to improve the national debt appears superficially to align with austerity measures. The reality is higher future taxes on the general population and a decline in living standards from curtailed public services. All the while, our student debt climbs ever higher, ruling out the possibility for many parents to help supplement their children’s higher education.
Education as a right, rather than a privilege
An era of austerity should not have to mean fees triple, university workers’ job conditions are worse, or we should accept lower pay and higher taxes. Student bodies have led campaigns up and down the country since 2012 to protest the moves. However, the lack of transparency in state affairs has left the organisational capacity hindered by accusatorial stances against “militant” students. The leaked report that outlined all plans to privatise, raise tuition fees and sell off old loan rosters had 90% blacked out when national papers got hold of it. Ultimately, the citizens have little accurate or detailed information to hand in the process of SLC’s changes to new contracts that will inevitably affect us all. It all sounds terribly undemocratic.
Meanwhile, MPs have often condemned student campaigns against fee hikes and interest rate changes, however, the lack of transparency and diversion of talking agendas have all but smothered the real student loan issue.
Financial security deterring students from applying
Universities increase their course numbers and accommodation by the year, anticipating an upward trend that they aspire to capture in competing for the potential students with other comparable universities. The hike from £3000 to £9000 led to a reduction in applicants and subsequently uptake rates. However, expectations from peer pressure, school trends and reputation to grade inflation have cornered many young people today to reinforce the notion that the only way to a stable career and financial security is by higher education.
Olivia Arigho Stiles remarked the government's move to privatise as "imposing a retrospective hike in tuition fees, further eroding the access and attractiveness of higher education to less advantaged students” Further hikes looming on the horizon alongside increases in repayments threaten to deter applicants who are already unsure of their financial security through higher education and beyond in a crowded, competitive job market and dissuasively outpricing housing market.
The bottom line
In the UK, we live in a democracy. Our elected politicians should be answerable to their constituents as our represented voice of the people. Where decisions are made by politicians in the pockets of lobbyists and private companies taking them out for lunches and dinners in between sessions of Parliament, leading to alternate revolving door and regulatory capture interests having a disproportionate say in policymaking, this constitutes a break from this expectation.
Our voices have been ignored. Democracy is not made up of important social decisions that take place outside of the public sphere, beyond our knowledge and our control. This is not Turkey with her curtailed civil liberties and ban on Wikipedia. Concurrently, if politicians truly wish to win us over on the matters that count and affect many lives in this country in the run up to June 8th, they must include us in the conversation. TMM