Many graduates will still be repaying student debts in their 50s, according to new report

David Kingman reports on some new research by the Sutton Trust which analyses what the long-term effects of the post-2012 student loans system will begraduation cap  on a pile of money ( student debt )

New graduates now face the prospect of being burdened with repaying their student loans into their 40s and 50s, according to a major new report from Institute for Fiscal Studies and the Sutton Trust.

“73% will have some debt written-off”

The report – entitled Payback Time? – makes a number of interesting observations about how the post-2012 reforms to higher education funding at English universities will affect the next cohort of graduates.

The biggest difference between the pre- and post-2012 higher education funding systems in England is that students can now be charged tuition fees of up to £9,000 per year for attending a course, and for the first time they are now charged a real (i.e. above inflation) rate of interest on this debt from the moment it begins accruing.

The Sutton Trust estimates that the typical graduate will leave university owing over £44,000, compared with just under £25,000 under the old system. The introduction of a real interest rate (which is based on RPI inflation, plus up to 3% depending on how much the graduate earns) is significant because it means the amount which they have to pay back will carry on growing.

As a result, the Sutton Trust estimates that the total amount which the typical graduate ends up repaying will be much higher; possibly as high as £67,000 over the lifetime of their debt, compared with under £33,000 before the changes were made. They believe that 45% of graduates will end up repaying more than they borrowed initially, whereas this was impossible (in real terms) under the previous system, because the interest rate was only the same as the rate of inflation.

Another important difference between the old and new systems is that the repayment threshold – the amount graduates have to earn before they are eligible to start making repayments – has been increased to £21,000. This means that lower-earning graduates will do markedly better out of the new system than they would have done before, while higher earners will lose out.

The length of time over which the typical graduate has to make repayments will increase as well. Under the old system, almost half of graduates had repaid their debts by the age of 40; now the Sutton Trust estimates that fewer than 5% will. Typical graduates will repay less during their 20s and 30s than they would have done under the old system (because they are less likely to cross the repayment threshold), but they will end up paying more when they hit their 40s and 50s.

As all outstanding debts are forgiven after 30 years, the Sutton Trust has calculated that as many as 73% of graduates could have at least some debt written off, compared with less than a third under the former system. The typical amount which is written off could be very large, too – as much as £30,000 on average. This has worrying implications for the financial health of the student loan book and, by extension, the public sector balance sheet which stands behind it. Some commentators have suggested that student numbers may have to be cut in future if the amounts which are written off become too large, with the worrying possibility that the withdrawal of support could be directly targeted at particular courses and institutions whose graduates show a pattern of non-payment.

“Middle-income earners pay back a lot more”

One of the most concerning features of the Sutton Trust’s report is that it shows graduates will be forced to make the highest repayments when they are entering middle age, a time when household finances are often particularly stretched already because of mortgage repayments, the cost of having children and the need to save towards a pension.

This point was emphasised by Connor Ryan, director of research at the Sutton Trust, when he was quoted by the BBC:

“The new system will benefit graduates who earn very little in their lifetime. But for many professionals, such as teachers, this will mean having to find up to £2,500 extra a year to service loans at a time when their children are still at school, and family and mortgage costs are at their most pressing. With recent revelations about the proportion of loans unlikely to be repaid, it seems middle-income earners pay back a lot more but the Exchequer gains little in return. We believe that the government needs to look again at fees, loans and teaching grants to get a fairer balance.”

A graduate tax in all but name?

What the Sutton Trust’s report makes clear is that the new student loan repayment system has effectively imposed an extra tax on graduates in all but name. Indeed, the report even contains a model showing how the marginal tax rate of a graduate changes under the new system as they reach different levels of income; a graduate who earns over £50,000 per year would now have a marginal tax rate of 52%, once income tax, national insurance contributions and student loan repayments are all accounted for.

Given that this tax has been imposed on the next generation of graduates largely by stealth, without a proper public debate that set out what the politicians were trying to achieve, the public deserves the chance to revisit the issue to see if this is really the model they want English universities to follow.

Unfortunately – given the precarious future that lies ahead for the student loan book if 73% of graduates aren’t repaying in full – it seems inevitable that we are far from finding a sustainable solution to the issue of how we fund our universities in the future.