Pay Back Time

Student loans are a contentious issue, as the former leader of the Lib Dems, Nick Clegg, can testify. In this country, successive governments have increased the burden on students, first by introducing loans instead of grants, then by charging for tuition fees (and then allowing universities to raise those fees).

In the Autumn spending review, the chancellor replaced the last maintenance grant, which was available to families with an income below £25,000 per year, with yet another student loan. Irrespective of your political views on the matter, it should be clear to everyone that the financial challenge facing students when they leave higher education has increased dramatically over the last twenty years.

An article in The Guardian by Jonathan Wolff, Dean of Arts & Humanities at University College London, looks at how those loans break down and what sums a student has to pay back over time.

The Lower the Income, the Higher the Debt?

He points out that a student on the lowest income, taking out all of the loans available (or perhaps that should read ‘all of the loans essential to fund their education’) will be in debt to the tune of £60,000 when they leave. Assuming they haven’t incurred further maintenance debts via their student overdraft.

That’s a daunting sum to place on anyone’s balance sheet and it becomes even more of a burden when you consider that we don’t prepare students for this in any consistent manner. Much of the financial literacy education that takes place in schools focuses on day-to-day budgeting, wants and needs and other useful but insufficient topics.

We Need to Help Young People Understand Financial Planning

What we need to be doing is to provide all students with a comprehensive education in financial and career planning. They need to understand just what it means to take on £60,000 of debt when you’re on a low income. Wolff points out that, under current tax legislation, students on incomes between £21,000 and £42,700 will have 41% of their salaries deducted through PAYE when income tax, national insurance and loan repayments are added together.

Given that over two—thirds of graduates won’t even go into graduate level work on leaving university, most are going to be at the lower end of that scale, if not beneath it. On a salary of £21,000 that leaves little over £1,000 per month to live on. If you manage to get a job in London, rent and transport alone will eat that up straight away.

The point of Wolff’s article is to illustrate how this system will crush the aspirations of the poorest students. It is certainly true that students from wealthier backgrounds, with much more knowledge of how to manage money successfully (due to the simple fact that they have more to invest, leverage etc) will be less daunted by the prospect of taking out student loans. However, for all students who lack the funds to pay for fees up front, the situation is one that will require students to manage debts of a scale unprecedented among their parents’ generation.

If we really want to encourage students to study for a degree, with the aim of building a better career (and in turn, benefiting the economy), then we need to equip them with the skills and knowledge they need to manage the enormous financial constraints that places upon them.

Without such skills, their degree won’t be giving them a head start in life, it will be weighing them down.