The problem that is student debt in the UK and US

One of the features of the modern era is the rise and rise of student debt. Regular readers will be aware of my view that it is one of the contradictions of the modern era that whilst we are told we are much better off we are apparently unable to fund university education in the way that we used too. For example for the benefit of younger readers when I went to the London School of Economics my fees were paid (by my local authority) and I got a grant for living-expenses although I was in the period where they were cut heavily. If I recall correctly I got in my final year the same amount as I received in my first term.

There has been some new research on the state of play so let us take a look firstly at the position in the United States.

White House Council of Economic Advisers

This published a report on the subject so let us start with some facts.

As of 2015, outstanding student debt had grown to $1.3 trillion, due in large part to rising enrollments and a larger share of students borrowing. While the average loan size has also increased, the average undergraduate borrower owes $17,900 in debt.

What is the individual experience?

Increases in per-borrower debt have also contributed to the expanding student loan portfolio, with average outstanding balances adjusted for inflation increasing by roughly 25 to 30 percent between fiscal years 2009 and 2015 alone.

The total number of those holding student debt has also risen.

In 2004, roughly 23 million individuals held student debt (FRBNY), and this number grew to over 40 million individuals in 2015.

The WHCEA is very bullish on the consequences of this.

Typically, that investment pays off, with bachelor’s degree recipients earning $1 million more in their lifetime and associate’s degree recipients earning $360,000 more, compared to high school graduates.

In fact according to it everyones a winner.

Society also benefits from these investments through such mechanisms as higher tax revenues, improvements in health, higher rates of volunteering and voting, and lower levels of criminal behavior.

The report has a fair bit of cheerleading in it but cannot avoid the fact that some do not do so well.

In particular, evidence suggests that the relatively low returns at for-profit colleges are increasingly becoming a cause for concern, especially given the high rates of borrowing by students at those schools.

More people went to university in the period 2010/11 in response to what is called the Great Recession and outcomes for them look less rosy than what is presented here.

The impact of the debt

The Demos think tank did some work on the implications of student debt by comparing households with a degree both with and without it.

It finds that, over a lifetime of employment and saving, $53,000 in education debt leads to a wealth loss of nearly $208,000.

We can generalize this result to predict that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households, not even accounting for the heavy impact of defaults.

Some care is needed as some of the wealth loss is via the fact that those in debt are assumed to make lower pension payments. But even the White House Advisory Council was unable to avoid pointing out that the share of income spent on student debt has risen from 3% to 9%.

What does the debt cost?

According to the US Federal Student program there are fixed interest-rates of 3.76% for undergraduates and either 5.31% or 6.31% for post-graduates. There are also fees of the order of 1% for the former and 4% for the latter.

Problems

It seems that for poorer income groups there is more of a problem for several reasons. They tend to go to not so good colleges and more drop out from higher education. Should you fall behind then this is what happens according to Bloomberg.

It’s 9 p.m. and your phone chimes. You’re among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you’ve started to fall behind on your payments.

You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.

The UK experience

For those unaware of the UK situation the Tony Blair and John Major governments set out to increase the number of students in higher education substantially. The Intergenerational Foundation sums the changes up thus.

This middle cohort now forms the post-1992 group of rebranded colleges that mushroomed in the 1990s and has led to the current situation where almost 50% of young people go on to university higher education. This amounts to a near quadrupling of the number of graduates of 3+-year courses with more careers, such as police or nursing, now requiring a degree.

It compares with the 1980s when the number of people going onto university higher education was more like 13%.

Doubts about the benefits

Back in the days when many fewer people went onto higher education it seemed clear that there were gains from it. From the Intergenerational Foundation.

On Friday 15 November 2002 the then higher education minister Margaret Hodge………. claimed that graduates earned £400,000 more than non-graduates over a lifetime, but their education is subsidised by 35% (twice as much as in the US).

If we move onto 2011 you will not be surprised to learn that becoming a doctor or dentist led to large “graduate premiums”

70.1% for men and 91.7% for women.

However the expansion of tertiary education was a lot less positive for many.

But many degree subjects regularly yield little or no premium at all, such as creative arts, design, sports science, and hospitality.

The overall situation is summarised thus.

Today, the average figures quoted for the graduate premium have fallen even further to around the £100,000 mark. Note that £100,000 spread over a 45 year career is worth only £2,222 per year, before taxes and National Insurance which is not high enough to cover even the interest that will accrue on the average loan – hardly a sound financial justification for taking on the debt.

On the other side of the ledger fees have risen as potential gains have fallen. Back in 1998 UK undergraduate tuition fees were introduced at a level of £1000 per annum whereas now in England they are increasingly £9000 per annum.

There is no one single interest-rate but much of the payments will now ( as of 2012) be at the Retail Price index plus 3%.

Comment

There is much to consider here and the opening salvo comes from the establishment which tells us not only that a university education is good but that it is so good that an ever rising debt burden does not matter. There are an increasing number of questions about the statement as we note that areas where it is true ( doctors & dentists) are being added to by areas where it is not true. If we stay within the arena of medicine what will happen to nurses troubles me. From Which.

Update July 2016: The government have confirmed plans to replace bursaries with loans for all nursing and midwifery students beginning their studies in September 2017.

So ever more debt but for what gain? How can nurses ever repay this? Also if it is so good why does the Bank of England omit it from the monthly money and credit report?

We move onto the next problem which is that ever more of this debt will never be repaid which poses the question of what is the point of it? It feels ever more like a rentier society where someone collects all the interest and the takes the loan capital but we then forget that. Another type of borrowing from the future.

We need to have a good think about what jobs actually require a university type education and which do not. Perhaps we could have more vocational types of higher education and maybe we might like to call them colleges and polytechnics.

Meanwhile I note that the UK establishment which spends so much time trying to discredit the “not a national statistic” RPI measure of inflation finds that like Lazarus it can leap from its claimed grave when required to inflate and raise revenues.

And it’s very far away
But it’s growing day by day
And it’s all right, baby, it’s all right

They can tell you what to do
But they’ll make a fool of you
And it’s all right, baby, it’s all right

We’re on a road to nowhere

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46 thoughts on “The problem that is student debt in the UK and US

  1. This comes up regularly on BBC Question Time, where some student is demanding that all his/her costs are paid “by the Government”, but it is in fact what Friedman called “middle class welfare” and is the mirror-image of the Wimmin demanding “equality” with the latest nonsense at Saatchi. We now live in a welfare-dependent society, where it is okay to borrow for a house or car, but not for education; where they keep on about “families”, but when granny gets ill, she is dumped in a home – amidst claims that the “Government” should pay, but the relatives want to grab the house. It all feeds into an “entitlement” philosophy and an attitude of “I will do what I like, but someone else is responsible if it goes wrong”. These are all sides of the same coin.

    Even if 45% of the nation are going to university these days, it means 55% are not. When I was at UCL reading Law in 80-83, there were slightly more women than men at the outset, although most of the casualties (about 40 of the 120, mostly at the end of Yr1) were women. However, within a few years, many of the women had married and had kids, dropping out of the main workforce and just working p/t or in retail-type jobs. Indeed, in 88, I met up with a girl from the professional course – she had a 2:1 from Bristol and she showed me a photo of her and 5 friends (2 covens as I read recently!): all the others were married, two with kids; she turned down a fabulous job opportunity and finished up in retail looking for a husband. It was all a waste of public resources to educate this lot, but it was their “right”. Now, we have the opposite situation where many jobs require a degree – not because they require some intellectual firepower, but because it is easier for those lazy clowns in HR/recruitment “consultancies” to eliminate candidates. Ironically, with grade inflation, the major law firms moved from degree + professional exams + something going for you to 2:1 only to strong 2:1 (ie: 6 x 2:1 grades of the 8 exams from Yr2 & 3) to strong 2:1 from a small number of universities, so that they finished up employing very similar people – hence perhaps all this “diversity” nonsense.

    None of the changes has done any good – many of the degrees are not worth the paper they are written on and much of the funding will never be recovered, so it is just future Govt spending to bail out the loan company.

    In short, if something is handed out for nothing, it will be abused (think water consumption before meters), especially by the middle class. So, you have to put a price on it – because only then can consumers make a rational decision. It also prevents those, who do not get the opportunity, from having to subsidise those, who do. The costs should be paid irrespectively to prevent the bad debt issues. then we will finish up with degrees being worth something and taken by those, who will make use of them.

    • The only bit I take issue with is, “…an attitude of “I will do what I like, but someone else is responsible if it goes wrong”…
      __________________________
      Well, if the banks can do it…”

      • It’s the quality of the rants that gets me visiting here most days when work allows.

        Some of them really are well argued,well reasoned with a genuine rage behind them.

        I love it when people are passionate about things.

    • ‘it is in fact what Friedman called “middle class welfare”’
      ‘Now, we have the opposite situation where many jobs require a degree – not because they require some intellectual firepower, but because it is easier for those lazy clowns in HR/recruitment “consultancies” to eliminate candidates.’
      ‘None of the changes has done any good – many of the degrees are not worth the paper they are written on and much of the funding will never be recovered,’

      Some home truths in there David,the reality is that many of these loans will end up being carried by the taxpayer when they are sold on at £0.02 in the £.

      The whole notion of 40% of people going to Uni was always Westminster Speak for cutting the UB rate.

    • “.. she turned down a fabulous job opportunity and finished up in retail looking for a husband. …”

      If neither of our mothers looked for husbands ( partners these days ) then neither of us would be here

      Educated women also tend to bring up better educated children , have then later in life and fewer of them *

      * can someone explain the obsession economists have with infinite population growth ?

      still never mind once the tech gets better men wont need women…

      http://www.dailymail.co.uk/sciencetech/article-3717887/How-build-SEX-ROBOT-Inventor-publish-handbook-success-Scarlett-Johansson-lookalike-droid.html

      at midnight she turns into a beef sandwich apparently …..
      ( I’m sure I pulled this one in Sluffs a while back ……. )

      The second point is that she could not find appropriate work part time with such good qualifications speaks a lot for UK companies employment strategies ( or lack of)

      Forbin

      • “can someone explain the obsession economists have with infinite population growth ? ”

        Because they believe there are only2 directons, up and down – no sideways. They then ignore the earliest tenet you are taught at the old “O” level (no idea what the appropriate qualification is today) that man has infinite wants and end up with a fantasy that economies must always grow to survive and the only way that can happen is to increase demand and the only way that can happen is to have an increasing population- like the only things we have ever consumed are food shelter water and energy!! Well, at least they got the “needs” correct……

    • Very good David – I knew girls like that too.

      Of course before meters water wasn’t handed out for nothing – we had water rates. A fixed annual charge regardless of use or value – a bit like degrees paid for with a loan. And that’s the problem with loans for education and opposed to loans for houses and cars. 60% of students having their debt written off doesn’t look high!

  2. I would also take into account the demographic effects of these loans. I have nieces who went to London and Bristol, but the effect of paying off debts before having the joy of saving for a house deposit means that they both deferred having children into their thirties. I am not sure that this is a good thing.
    I was also in Shaun’s golden age of “free” education and have funded my kids through university so that they can start with the same as I had, i.e. a degree but no debt (or money) as they head for life. University does cost £20k a year now (fees £9k, accommodation £6k, living expenses £5k) so it is a lot of money.
    I take David Collins’ points above (you obviously feel strongly!!) but came across a student from Singapore recently. He said that the system was to borrow (a lot) from the government, but that this is written off at 20% a year so long as the graduate is paying taxes from full-time employment in Singapore. This seems to be a good compromise.

    • Quite right about proper incentivisation and a rebate for those, who pay in more due to making the effort. It is a similar point to my bugbear with Barclays (for which I was fired!) querying why they charge 2-3% for a house loan and 12% for educational-type loans (or 17-18% when I took my MBA).

      The other “student” short-sightedness is over inherited money. My grandparents died around the time I went to university – mother’s parents rented, so nothing much there; father’s parents left a terraced house in Rugby and I received 25%. So, I actually inherited £2250 (!!) or about 4 terms of the full maintenance grant at the time. I looked at the house on Zoopla recently and it was priced at £180K (£8k back in 1980), so I would have received £45K or so now – more than 2 years of all the costs.

    • People need housing and maintenance whatever their circumstance, so I don’t really think you can put that down to university costs

  3. 1) Most of the young people now at university should either be at college, or part of the workforce.
    It is part of the deferred adulthood, to which I have previously referred, and we probably have the best educated shop staff in the World.

    2) Student grants would show up as Govt. spending and would make the deficit far greater than it is, whilst student loans, even if a huge percentage are knowingly going to be written off ( I read that the Govt. expects to write off will not, at least until they are written off. An accountancy trick which further indebts future generations.

    • ‘It is part of the deferred adulthood, to which I have previously referred, and we probably have the best educated shop staff in the World’

      Too true RB………………

      How do you buy a house at 10 times salary and clear a £40,000 student debt when you’re working at B&Q? I ask because in the mid 90’s I worked in a call centre and even then it had a lot of graduates working there.

      We had no debts generally,a 2 up 2 downhouse in an ok bit of Leicester was £30,000 and we were paid £12,000.

      From what I hear the wages aren’t much more these days.Yet the house prices are £120k

      ‘An accountancy trick which further indebts future generations.’
      Something that won’t surprise anyone who reads this blog.

      • hi Dutch

        I did wonder how far our pollies could go with this

        “‘It is part of the deferred adulthood, ”

        in which of course you’re off the books from 16 to what 23/25?

        and then you’re not counted on the unemployment list if over 55 , even if you have to work until 67/70

        on sickness as well in between , and mostly later in life

        and zero hour contract or self employed with 1 hour a week

        make you wonder if the unemployment figures mean anything at all……

        Forbin

        Popcorn has its own meaning …. yum !

      • “From what I hear the wages aren’t much more these days.Yet the house prices are £120k”

        So, houses are 4 times more and interest rates are 4 times less – plus ca change.

        • Sorry, I meant ” interest rates are 25% of what they were in the 90’s – plus ca change.

  4. I was amused to read the other day the novel suggestion that school should cease at 14 (presumably for most not all) at which time the leavers should go into some form of apprenticeship or job training. For younger readers this would be a return to the status quo ante.

    Our educational reforms of the 19th c. were a desperate catch-up to the educational advances of Germany and I think that job training as opposed to university is still a cornerstone of their not unsuccessful economy. Anybody know the German university figures & finances?

  5. Hello Shaun,

    Put them into education to keep them off the unemployment stats

    then make them pay for it

    then pump up assets ( houses )

    then screw them over again by making them pay for pensions ( we’re all in it ) that will payout 97pence on every pound put in .

    Who is being saved? the Banks ……

    It seems in a botched job to mimick Germany’s higher education standards and apprenticeships tied with the false conclusion that everyone with a Uni degree had a high wages ( as you stated) so ergo more uni degrees means more high paid workers*

    * ( when the effect was screwed by the fact to get people into uni meant lowering the entry exams ( got a pencil ? welcome! ) and that once common place they lost value ( hey I got 2 pencils ! )

    Now we wonder why nobody has any money to pull the economy out of recession ….

    And why am I paying for Scotland’s Uni degrees ?

    Still , unlike some, I never went to Uni , nor did I get fired …..

    I have been accused of the occasional rant though ….

    Shaun I find it hard to see a way out of the Uni trap that our HMG has set. Uni was for the highest brains of the land , now we have one which , because of inverted snobbery of the left and the loony right wing privatized the lot brigade , is frankly worthless .

    It used to be said those who went to uni couldn’t find their laces to tie up , now they can’t even use velcro …..

    A uni degree was sometimes seen emptying dustbins , now you need one to empty a dustbin

    another misallocation of resources …….

    Forbin ,

    Ps: maybe I need a degree to eat popcorn ?

    • I’m not sure you understand the -3% model.
      It means that -3% is the GROWTH rate.
      Yes, that’s right, if you pay into a pension for 40 years, the first seven years are gone!!!

    • ‘Who is being saved? the Banks ……’

      Yep,who’s going to pick up the £0.02 in the pound debt and then chase the assets ?

    • Hi David

      Thanks for the link. Also just to add my late father was a great fan of the vocational educational system from which he had benefited from at the Brixton School of Building where he studied to be a surveyor. Actually considering its location not far from the Oval cricket ground that may not have been th eonly reason he remembered it fondly.

    • The article reflects my own thoughts which I have held for 30 odd years now.

      In my business I deal with company owners with degrees right down to company owners with a couple of “O” levels.

      The lesser educated simply have more “instinct” than the higher educated bu they all make roughly the same money.

      Oh and the higher educated have a marked lack of common sense and practical ability.

  6. Shaun,

    So pleased you’re picking up on this issue with your usual attention to detail.

    I’d like to make a few points if I may.

    Firstly,the notion that graduates will earn more over a lifetime is based on some quite misleading interpretations of the data.

    As with banks risk weighting-some(generally the smaller ones) use the Standardized Approach,some the IRB(this is based on their own data generally from loans over the last 20 years).Just as IRB risk weighting is based during an era of easy monetary policy and fiscal policy,so student incomes over the next 40 years are being skewed by the incomes of those who went to uni when only 10% of people did and earned big salaries during an era of easy monetary and fiscal policy.

    When I look at those of my acquaintance who’ve done well in life,many don’t have degrees.When I look at the people I went to Uni with,many ended up in govt jobs where you don’t really need a degree.

    Secondly,as a result of this misleading interpretation,Universities have expanded capacity and have-in my opinion- missold degrees to people.Just as the income data has been skewed,so has the offerings of the Uni’s,away from cost heavy degrees like science and engineering,to more profitable areas of the arts/sports science/journalism etc.Instead o0f providing labs and 30 hours lectures a week,they are offering courses that offer 8 hours a week and no labs.

    The net result is that the income data is based on era when we produced a lot more science and engineering grads and is being extrapolated out to cover the future where the vast bulk of new degrees will be based on 8 hours a week.

    Thirdly,the data on student loans omits a very important point regarding the nationality of borrowers.Many EU citizens can access our student loans.Clearly,collecting loans from people who may not end up living and working in the UK is going to raise costs.Obviously,UK students might end up living abroad as well.
    https://www.nidirect.gov.uk/articles/financial-help-eu-students

    Fourthly,default rates are being heavily skewed by the last 20 years data.I think the default rate will surge as less and less people can earn the £21k or equivalent.

    • “….missold degrees to people…… ”

      Never ! well as they are now all businesses ….

      forbin

      PS: great Uni mis selling scandal …..

    • “Many EU citizens can access our student loans.Clearly,collecting loans from people who may not end up living and working in the UK is going to raise costs”

      Never mind, no doubt Brexit will fix that, although I don’t know how the NHS is going to manage to function!

    • “Firstly,the notion that graduates will earn more over a lifetime is based on some quite misleading interpretations of the data.”

      But if vacancies for even low-skilled jobs are closed to graduates by lazy PR depts. it surely means that graduates have a much better chance of being not only employed but fully employed.

  7. Great blog as always, Shaun.
    One of the most intriguing things in the proposal by Jill Leyland and John Astin for a household inflation index for the UK was that it would take account of student debt, as neither the CPI nor the RPI/RPIJ do. The National Statistician, John Pullinger, said he plans to go ahead with work to calculate an HII. If the ONS does so, it will, in its treatment of student debt in particular, boldly go where no national statistical institute has gone before. It should be encouraged to do so. You definitely don’t want a payments approach to higher education in an inflation measure targeted by the Bank of England, but it would be highly appropriate in an index designed for upratings.
    It was good that you pointed out the RPI is still used in indexing the interest rate on student loans. It shows just how budget-driven all the UK government’s decisions in such matters seem to have been, in defiance of any kind of logic.

    • Hi Andrew and thank you

      The RPI formula is easy which goes as follows. If it is useful to the establishment – charging the 99.99% or Bank of England pensions- it is used. If not it is an archaic measurement system which should be abandoned! Plainly the system as a whole should choose a consistent measure.

      As to the HII I agree completely that the inclusion of student loans is one of the advances it brings and here is a taste of it for those unlike us who are less familiar with it.

      “The final section is concerned with the special difficulties associated with the price index treatment of student loans. We strongly believe that student loans – an increasing burden on graduate households – should be covered in the HII – both in respect of the “capital” element of repayment as well as the interest element. Together these can form a significant part of the total expenditure of the affected households.”

  8. Don’t get me started on sudent loans…oh you have.

    My son in Australia, goodness knows how, got the full student loan amount he has outstanding and put it into my Australian account and told me to pay it in GBPs over here. This way there is no commission and the exchange rate is not the ‘tourist’ rate. I insisted he hold off and now it is 7% cheaper. Probably will be even cheaper over coming years as the GBP goes down in value?

    Is that one problem with inflation? All that student loan money will be in seriously devalued GBPs in a few years? Get, say, 10*$100 bills and stick them in a jar. A few years later turn them back into a gazillion GBPs and pay off the loan…and have a couple of hundred GBPs left over to buy a cup of coffee with?

    • Nice plan chrisrick13 but with one easily corrected flaw.

      By the time this all comes to fruition a couple of hundred quid won’t get you a full cup of coffee.

      Fear not though, for our Self-certificated Low-interest Coffee Cup Lend/Lease scheme is designed with customers like you in mind.

      Easy monthly payments and a sensible balloon payment … what could possibly go wrong?

  9. First – thanks for all the articles Shaun – last few have been brilliant – so too have all the comments that follow – shame you have no “like” button.

    Student loans, back when I was a student – before Shaun.. education costs were paid by local council and, in my case, the “grant” for living was in fact, means tested to parents income, meaning my father had to contribute as he had a “decent” salary. I thought this was “outrageous” at the time – but now realise, no way would I “drop out” due to parental cost element. Students whose parents earned less received full grants – thus their entire education was fully paid for. Shame means testing was scrapped.

    I note pensions were mentioned in comments above. I have no idea how students today would be able to contribute to a pension plan – which ALL employers now have to “provide” for staff. However, student debt can, I believe (not 100% sure), be deferred if said student earns below a certain amount. When said student comes to retirement and they are ready to cash in the meagre amount they have managed to save, they will be in for a surprise. I recently sorted out a pension plan and the first question I was asked : Do you have any outstanding student debt. I suspect any “lump sum” could well be sent direct to pay off student debt.

    • Hi Ruth and thanks.

      I think you are right about pensions. You also made me wonder about a comments rating system and as I searched through the system I have found one tucked away in a place I had never looked before. Amazing what you can find so as of tomorrow I will give it a go and let’s see what happens.

    • “…student debt can, I believe (not 100% sure), be deferred if said student earns below a certain amount.”

      http://media.slc.co.uk/sfe/1617/ft/sfe_terms_and_conditions_1617_d.pdf – “You’ll only start making repayments when your income is over the current threshold of £404 a week,
      £1,750 a month or £21,000 a year.
      If your income falls below £21,000 a year, repayments will stop and only re-start when your income
      is over £21,000. You can also make additional voluntary repayments to SLC at any time which will
      reduce your balance earlier.
      Repayments are based on your income, not what you borrow or the number of student loans you have.”

    • It gets written off 30 years after you become eligible to pay or for pre-2006 loans, when you are 65. You don’t pay until you are earning more than £21K. This is why 45% is expected never to be recovered, requiring a Govt bailout of the Loan company somewhere down the line.

    • Since student debt is, I believe, to be written off after 30-35 years, isn’t this a minor problem, only for “mature” students.

  10. Pingback: Central banker speak gets ever more Orwellian | Notayesmanseconomics's Blog

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