Our broken student loan system has to be fixed

What’s gone wrong with student loans? Something sure has. In 2012, when the Government raised the maximum universities in England and Wales could charge from £3000 a year to £9000 a year, there was carnage. Demonstrations raged on the streets, and almost everyone concerned, from professors to bumptious primary school children, seemed to be up in arms.

I am a member of that 2012 cohort myself, the first to pay £9000 a year for tuition alone. And I can tell you, if the backlash seemed bad when the change was made, we haven’t seen the worst of it yet. In 2012, when the policy was introduced, the concerns were academic. Five years later, now that those who paid the full £9,000 a year are settling into full time jobs, the repercussions are measurable.

Here at Reaction, we’ve done some work based on the studies available online, and the findings don’t look good.

My friend (let’s call her Claire) who graduated from university the same year as me, provides an alarming case study. As a state educated woman with no family money behind her, Claire took out a £40,000 loan over the course of three years to pay for her law degree and living costs at a top Russell Group university. She graduated in 2015 with First Class Honours, and landed a job at a reputable London consultancy firm with a starting salary of £35,000. In the two years since then, she has received a 2% pay rise per annum (in line with the UK average), and expects to continue on this trajectory for the foreseeable future. Assuming RPI stays at 3.5%, and the interest rate charged on student loans stays the same (between RPI + 0% for those on £21,000 up to RPI +3% for those on £41,000 plus) she will pay back an impressive £16,000 over the course of 10 years.

Unfortunately for Claire, this isn’t going to do her much good. The interest rates, which start off high, are compounded. They will increase at a rate that will soon outstrip her pay rises. This means she will amass more debt each year, and interest will be charged on the new, higher, sum. Things will spiral, and between 2015 and 2025, she will accrue nearly £27,000 in interest. Shockingly, at the end of 10 years of dutifully paying back her loan, she will owe more than she did when she graduated.

The platitude doled out to 18-year-olds on the verge of miring themselves in £45,000 debt is “don’t worry, you don’t start paying it back until you earn £21,000, and then it’s only a tiny bit – most people never even have to pay it off”. And it’s true, by staying in low paid jobs or leaving the country, a lot of people can avoid paying back all the money they borrowed.

But, of course, the Government still needs that money, and it’s found a way to make sure it gets it. If you never reap the financial rewards promised from a university education, it’s true that you’ll pay back almost nothing. But if you work hard, make the most of your education, and earn above the threshold, you will not only pay back your own debt, but, through inflated interest rates, the debt of those who had the same education but made less use of it. In other words, aspirational young people are effectively being given a disincentive to strive for success.

So what do we do about it? Well even I, with an eye-watering debt of £47,000 (and growing), can’t jump on the Jeremy Corbyn “scrap it all” bandwagon. Setting aside for a moment the fact that it’s economically illiterate and he could never actually do it, it’s also totally unfair.  As Dr Tim Bradshaw, Acting Director of the Russell Group, blogged recently, a sustainable higher education system is one which gives equal weight to the interests of students, universities, and taxpayers. Any system which favours two of these groups to the detriment of the third is destined for failure.

Looking at the situation in Scotland and Germany, it seems like he is right. In Sturgeon-land, the SNP has not increased taxes enough to fund its policy of offering free higher education to all Scottish domiciled students.  The result is that rich students and some taxpayers are happy, but Scottish universities are chronically underfunded and are having to put a cap on places to keep costs down – which is preventing the poorest students from going on to higher education. To make up the shortfall, they are also accepting a disproportionate number of overseas students and charging them extortionate fees.

In Germany, the government has just announced that it is ending free tuition for everyone. Students and their universities were benefitting, but voters were questioning whether it was fair to increase the taxes of an 18-year-old carpenter to pay for her contemporary’s route into investment banking.

It seems a sound system should be built on three truths. Indeed, they underpinned the introduction of fees and their increase:

1. Our world class universities need proper funding.
2. Graduates should contribute towards their tuition in recognition of their higher earning potential.
3. Taxpayers should financially support graduates in recognition of the value they bring to the UK.

But the system in England is a mess and the government has created a tangle. Both the rates of interest charged and the structure for repayment of the loans are inequitable.

Two aspects of the problem merit more scrutiny. First and foremost, students are supposed to be aspirational. A policy which disincentives them to earn simply doesn’t sit right in a country that needs to be ambitious economically. Surely, it’s time to abolish the “sliding scale” of interest rates that punishes success?

Second, the fact that some of our universities have “world class reputations” seems, historically, to have exempted too many other universities from scrutiny. It has been proven that a degree from Oxford is worth more in the job market than a degree from one of the “old polytechnics”,  yet under the current system, they are allowed to charge their students the same. For the sake of both the students from low-ranking universities, who will be saddled with debt they are unlikely ever to pay off, and the students from higher ranking universities who will foot their contemporaries’ bill through high interest rates, universities which are not delivering value for money should not be allowed to hide behind the cloaks of their superiors.

There are many more broken aspects of the system which need to be examined soon, but it is these two which warrant the most urgent attention. There is a febrile mood in the country at the moment. Between Brexit and the housing crisis, my generation is already feeling pretty disgruntled. As they start to settle into full time jobs and realise that they have been duped into a lifetime of spiralling, uncontrollable debt, they may just burst with indignation. If the government wants to avoid repeats of 2012 with knobs on, something needs to change. And soon.