The introduction of student loans in the UK was meant to introduce a more vibrant dynamic market for higher education. The idea was that we would copy the United States and create a new Higher Education market with new entrant institutions financed by a larger number of students studying to improve their career prospects. As the Treasury has been colonised by bankers what was not to like about the fact that this would be financed by larger and larger student loans.
The fact is however that this model does not work. Student debt in the US is now reaching crisis proportions and this is no longer looks like such a good idea. Student debt in the US is now higher than all US credit card debt or auto-loan debt and according to some US commentators it is having serious negative effects on the US economy.
Since 2004 US student-loan debt has quadrupled with some 40 million people now owing around $1.3 trillion. Over the same period student-loan defaults have also nearly doubled. The average student-loan debt of a bachelor's degree student has risen from $15,000 in the mid-1990s to the most recent class of 2014 graduating with debts of $33,000.
This debt burden is having two major economic impacts firstly there is a crowding out effect as unable to take on any more debt fewer people are buying homes and cars. The second effect is as larger portions of incomes are eaten up student loans people are less likely to engage in entrepreneurial activity and to start new small business.
So what has this to do with the situation in the UK? Well the House of Commons Library published a paper at the beginning of October on Student Debt with the following predictions, “The Government has projected that the outstanding cash value of publicly owned student debt in England will increase to around £100 billion in 2016-17, £500 billion in the mid-2030s and £1,000 billion (£1 trillion) in the late 2040s.”
Now a trillion pounds is a lot more than a trillion dollars so you can we are copying the US alright but not in a good way! Both the scale and rate of this debt increase is staggering. The Office for Budget Responsibility (OBR) does not project the size of the student loan book per se, but the additions to net debt from student loans. In some ways this underestimates the issue but it does give us an indication of what is happening by representing the cumulative cash flows (spending less repayments) on loans as a proportion of GDP.
It gives us an indication of the scale of lending. Their latest projection is that across the UK student loans added 3.5% of GDP to net debt in 2014-15 (around £63 billion). This is all loans, repayments and sales up to 2014-15, not just net lending in that year. This rate is expected to increase rapidly over the next two decades (even with planned loan sales) before peaking at 8.8% of GDP.
This is a serious drag on the economy as a whole. The fact is however that the creation of a market for Higher Education has made students the latest target for what have been called NINJA loans (No Income, No Job, No Assets). This is the next sub-prime crisis in the making because it underestimates the total of student debt. Students do not just depend on their student loans they rely on a host of other forms of credit too – from overdrafts and credit cards to payday loans – all specifically marketed to them because of their limited income.
The whole loans process is enormously expensive: about one-third of all the money lent to students – approximately 10 per cent of public spending on higher education – is never repaid just because of the interest subsidy that the Government spends supporting the loans. Even so the lack of jobs paying sufficient to enable repayment of loans is leading to just 45p in every £1 of loan being repaid.
No wonder this month Moody’s, the ratings agency, has downgraded the Higher Education Securitised Investments Series No. 1 PLC's debt (part of the sold off student loan book) because of higher than expected defaults and the higher than expected proportion in deferment. From these types of loans they are only expecting a 30% recovery rate.
Looking to what is happening in the US we know this is a ‘ticking time bomb’ as the young are shackled with mountains of debt that will take decades – during their prime earning years – to pay off if they are lucky enough to get a well-paying job and a rising number will never pay off these debts. The government are so concerned about the poor repayment of this debt they are considering reducing the salary at which payment commences from £21K to £18K. Not quite the fantastic graduate salary students have been promised.
Not only is the UK seeing the emergence of its own Generation Debt – where the young must mortgage their future to gain access to today’s economy but the whole structure of these debts is beginning to have a deleterious effect on the economy.
Time to stop this process before it gets any worse, there has to be a simpler way of financing higher education. The Loan route produces far too much waste in this system with money that should be being spent on actual education leaking out of the system in finance costs. The Government already effectively funds half the costs of graduate’s tuition why not cut out the financiers and support the rest?
Shadow Chancellor John McDonnell has called for the burden of fees and debt to be removed. That burden however is not just on the individuals concerned this crazy method of financing higher education is a burden on all of us.