Student debt in the United Kingdom was well on its way to reaching crisis proportions before the recent changes in student finance instituted by the government. With the changes, student debt and the accompanying economic and societal problems it is creating is expected to triple from its present level of about £101 billion to more than £298 billion in 30 years. Although the $1.3 trillion in student debt in the United States dwarfs the UK’s debt load, on an individual basis, UK students will carry nearly twice the average debt, about £45,000, of U.S. student borrowers. With an economy just one-sixth the size of the U.S., runaway student debt could have serious economic implications for the UK.
Government Reforms Exacerbate the Problem
Until the recent changes in student finance, low income students could receive maintenance grants from the government that could be used to offset tuition and living costs. In an effort to reduce government expenditures, the grants are being replaced with loans beginning with the 2016/2017 school year. That means low income students will have to bear the same burden of debt as higher income students. The government also put a freeze on the repayment threshold at £21,250, which means, once a student earns more than the threshold, he must begin repayment of the loan. At the same time, the government is allowing the universities to increase fees in line with inflation.
Taken together, these changes are expected to result in more money loaned, per student and overall, while increasing the amount that must be repaid by middle and lower earning graduates. While the average debt for university graduates is expected to reach £40,675, the average debt for low income graduates could climb as high as £53,956. And, when you factor in future interest the problem only grows. In both cases, the amount of debt taken on has more than doubled over the last ten years. Student borrowers today can expect to make repayments well into their 50s and most will not repay their loan in full, creating an even heavier burden on the government.
Economy Offers Fewer Opportunities to Recoup Investment
The policymakers behind the changes use the rationale that student borrowers benefit from attaining a university degree; so, a student loan is like a mortgage in that they borrow to invest in an asset. However, the data indicates that the slow recovery in the UK job market cannot produce the same income gains from a degree as in previous periods, especially when there was state subsidies available.
The data doesn’t account for the additional burden of personal debt many students take on to cover their living needs. Many students rely on other forms of debt, including overdrafts, credit cards and payday loans simply to survive. According to the Bank of England, 79% of 18-29 year olds hold some form of unsecured debt. Over half of young people are turning to their family for money. In most households, the cost of contributing to their children’s education is second only to their mortgage.
Ripple Effect of Exploding Student Debt on the Economy
The effects of higher tuition, bigger loans and long repayment periods are beginning to make themselves felt in the U.K economy. The UK economy relies on a highly skilled workforce and it also takes in billions of dollars in revenue from the universities. As middle to lower income students come to question the tangible value of a college degree and opt instead for trade schools or simply joining the workforce, the universities will see their revenues decrease and the economy will lose its stream of highly skilled labor.
Rising housing prices, falling real wages and tighter mortgage lending criteria have converged to make it harder for first-time buyers to own a home. The number of young adults who own their own home has fallen by nearly 40% in the last decade. A home purchase is most certainly out of the reach of middle to lower earning graduates with student debt. Now, with recent changes in mortgage underwriting guidelines, an even greater number of college graduates will be pushed out of the home market. In the United States, refinancing is possible through private financing companies. However, in the UK this option has yet to emerge. Should a private refinancing program emerge, it may allow a greater number of college graduates to enter back into the home market.
Until recently, student debt was not formally included as part of the affordability calculation for mortgages. Student debt-holders could apply for a mortgage without their student debt counting against their ability to pay. Mortgage lenders now include the cost of a student loan, which can greatly reduce the level of mortgage borrowing. Homeownership is expected to decline even further among young adults in the coming decades, which will not only be a drag on the economy, it will further stunt the upward mobility of future generations.
Over the last decade, increasing college fees has led to increased borrowing, more than doubling the average amount of debt carried by student borrowers. The recent reforms by the government to eliminate the low income subsidies and lower the income threshold for repayment has essentially baked in the problems students, the universities and the economy will experience for generations to come. There are no easy solutions, except that it does all start with the high costs of a college education.