A report has found that nearly eight in ten graduates will never pay off their Student loans Debt, following changes to the way funding for higher education is organised.

The Institute for Fiscal Studies, which produced the report, said that students and taxpayers will be worse off in the long run, whilst Universities themselves are able to exploit the developments to maximise income for themselves.

Interest rates can cause a debt to almost double

Debts are wiped out after thirty years, and payments are only charged once an earning threshold has been reached.  But interest rates are high – currently up to three per cent above inflation.  The average interest charged on a typical £45000 loan is just under £6000 whilst studying.  But over time, as the debt is slowly tackled, interest grows and can become close to doubling the cost of the original loan.

Those who graduate and enter jobs which do not pay above the threshold – currently in the low £20000s – will not incur as much interest because they are will never be able to pay off the full amount of the debt.

Whilst some will argue that it is right that higher earners pay off the debt, others see the system as a tax on moving into a successful career.

Taxpayers may have to foot the bill of Government miscalculations

There is an impact on the tax payer as well.  As parents increasingly pay off debts up front, or when their children begin earning enough to face repayment charges, so the overall income to the Government drops.

It is the taxpayer who will have to meet any future shortfall.  Nevertheless, the changes in the funding system have led to an overall saving of around £3bn per year, although this figure is somewhat skewed – and reduced – by the fact that a third of collective Student Debt will never be recovered.

Poorer students are worse off…

However, it is not just higher earners who will suffer.  Changes to the maintenance grant system have meant that students from the poorest background are incurring the largest debts.  This is seen by many as a deterrent to those from lower income families to engage with higher education in the first place.

The option of a career in a trade might become ever more appealing, with a chance to earn whilst undertaking an apprenticeship, a shorter training period, no debts and the likelihood of a better short and long term income.

But the Universities are coming up smelling of roses.

The one group in this who seem to be doing well are the Universities themselves.  Their funding is up by around twenty five per cent per pupil since 2011, and the average income they receive now per student degree is £28000.  They have also been allowed to increase the costs of their fees.

However, that figure is not dependent on the cost of providing the qualification.  A University receives exactly the same amount for a relatively inexpensive course in, say, English Literature as it does for an expensive science degree.

A muddled strategy?

This has caused concern amongst strategists, who feel that the Government should have the means to direct Universities towards the provision of degrees that are more beneficial to the economy, such as in engineering, science and maths.

On the other hand, there are plenty of educationalists who feel that a degree should not simply be an economic entity.   They would argue that to study great literature, history or foreign cultures adds enormously to society in other ways, albeit ones that are harder to measure.

Other opponents to the current system feel that it prevents Government from using funding to target certain groups in society – although the cynics might suggest that the fact those from poorer backgrounds end up with greater loans is a form of social manipulation already in operation.

The battle over student loans continues to rumble forwards.  The Government is saving money in the short term, but the considerations for individuals paying back 9% of their income for much of their working lives seem to be dropping off the list of priorities.

There also appears to be a lack of foresight in anticipation of how parents and graduates will tackle the imposition of the loans with their high interest rates.  Forecasts and plans based on expected returns will need to be adapted in the light of people working out repayment systems which work best for them.

Some might suspect that the policy has not been as well thought through as it might have been.

Alan Peters