The problems of student debt and loans are mounting

The UK university system is facing trouble on more than a few fronts. Some are struggling full stop as we note talk that they will not be bailed out. That comes on top of the issue of student loans and debt which makes me wonder how useful a degree is these days? Especially at a time of struggling real wages.  Although wages for some do not seem to be a problem. From UK Parliament in June of this year.

A table of vice-chancellors’ salaries in the Times Higher Education in June 2017 showed that Dame Glynis Breakwell, the vice-chancellor of the University of Bath was the highest paid university vice-chancellor in the UK; in 2016-17 she was paid a salary of £451,000. The table showed that vice-chancellors at six other universities also earned over £400,000 in that year.

Average pay was found to be £290,000 including pension contributions. You may recall that the University Superannuation Scheme became a hot topic for a while as there were strikes after suggestions that defined benefits needed to end. That was eventually resolved with higher contributions ( but not as high as originally suggested). Previously the total was 26% of salary split 18% employer and 8% employee.

The panel recommended that DB pensions could continue to be offered with contributions rising to 29 per cent — significantly lower than the 36.6 per cent from April 2020 proposed by USS, based on the valuation as it stands. ( Financial Times)

As an aside it was a shame that the Bank of England was not contacted as its research could be used to show that in fact such pensions have benefited from its policies. In spite of course of that fact that its Chief Economist Andy Haldane confessed to not understanding them. Oh well!

Moving on, payoffs to Vice-Chancellors had become an issue such as the £429,000 payoff at Bath Spa, £230,000 at the University of Sussex, and £186,876 at Birmingham City University. Coming back to pay the HM Parliament research showed that Vice-Chancellor pay had risen at an annual rate of 3.2% when other academic staff were restricted to 0.7%.

Student Debt

A glimpse of a potential future can be seen in the United States. Last night the US Federal Reserve updated us on total student debt at the end of the third quarter and it was US $1.563 trillion. One perspective is provided by the number below it for total motor loans which is a relatively mere £1.142.8 trillion. In terms of past comparisons the number for 2013 was £1.145.6 trillion for US student loans.

Noah Opinion on Bloomberg looked at it like this.

Many educated millennials would likely agree — since 2006, student debt has approximately doubled as a share of the economy……..The increase seems to have paused in the past two years, possibly due to the economic recovery (which allows students and their families to pay more tuition out of current income) and a modest  decline in college enrollment. But the burden is still very large, and interest rates on student-loan debt are fairly high.

His chart shows student debt being around 7.5% of US Gross Domestic Product and I can update his view because unless the US economy is growing at an annual rate of 5.6% then the burden is rising again.

Also the repayment issue is similar to that we have and indeed are experiencing in the UK.

Education researcher Erin Dunlop Velez crunched data that was recently released by the Department of Education, and found that only half of students who went to college in 1995-6 had paid off their loans within 20 years. Given the vast increase in the size of loans since then, repayment rates are likely to be even worse if nothing is done. Velez also found that default rates are considerably higher than had been thought.

There is another familiar feature.

What’s more, student lending has almost certainly contributed to the rise in college tuition, which has outpaced overall inflation by a lot. When the government lends students money, or encourages private lenders to do the same, it increases demand for college, pushing up the price.

In the  UK a lot of the inflation came in one go.

In the 2012/13 academic year, students beginning their studies could be charged up to a maximum fee of £9000 for first year courses compared with a maximum of £3375 in
2011/12 ( Office for National Statistics).

Whilst the weighting for university fees is low the substantial rise had an impact on the overall numbers.

In total, university tuition fees for UK and EU students added 0.31 percentage points to the change in CPI
inflation between September and October 2012. This was the largest component of the rise in the headline rate from 2.2 to 2.7%.

The CPI measure was particularly affected as it includes international and European Union students whereas the RPI only has UK ones meaning that the weight is around three times higher. That becomes quite an irony as we note the invariably higher ( ~ 1% per annum) RPI is used in the interest-rate on student loans. The road from being “not a national statistic” to being useful is short when it is something the public are paying or indeed Bank of England pensioners are receiving.

Comment

Let me start with some welcome good news. The Times Higher Education rankings show Oxford University at number one with Cambridge second and Imperial College ninth. My alma mater the LSE slide in at number 26. So we are getting something right as whilst it feels by hook or by crook our universities are highly regarded around the world. I think we do that a lot as we focus on issues ( the impact of the PPE degree course at Oxford on our political class) and maybe lose vision on the wider picture. Our institutions are often highly regarded around the world.

Also many more people are going to university as this from Gil Wyness at the LSE points out.

The UK has dramatically increased the supply of graduates over the last four decades. The proportion of workers with higher education has risen from only 4.7% in 1979 to 28.5% in 2011 (Machin, 2014). Rather than this enormous increase in supply reducing the value of a degree, the pay of graduates relative to non-graduates has risen over the same period: from 39% to 56% for men and from 52% to 59% for women).

However the issue of pay is a complex one as of course overall pay growth has slowed which if the workforce has become better qualified looks even worse. Also there is this which needs some revision I would suggest.

The expansion of universities helped raise growth and productivity (Besley and Van Reenen,
2013),

The financing side is much more shambolic though. The upside of the student loans era was supposed to make universities compete more, does anyone believe that now? Next comes the issue that a high interest-rate (6.3%) is used to raise the debt calculated like this by HM Parliament.

Currently more than £16 billion is loaned to around one million higher education students in England each year. The value of outstanding loans at the end of March 2018
reached £105 billion. The Government forecasts the value of outstanding loans to be reach around £450 billion (2017-18 prices) by the middle of this century.

No wonder the Bank of England dropped consumer loans from its credit figures! But more fundamentally debt is supposed to be repaid and yet we know most of this never will be. Yet along the way it will affect those who have it should they look to buy a house or have other borrowing.

The average debt among the first major cohort of post-2012 students to become liable for repayment was £32,000. The Government expects that 30% of current full-time undergraduates who take out loans will repay them in full.

The anthem for this comes from Twenty One Pilots.

Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out
Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out

 

 

 

 

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26 thoughts on “The problems of student debt and loans are mounting

  1. At current rates of RPI (not an official statistic) student debt will double every 10 -12 years, if not paid off – do people realise this? A modest salary is only needed, to start to have try a reduce this debt.

    The introduction of the maximum £9000 fee was a sad joke. It was to be charged by a few universities, we were told, who offered assisted places to disadvantaged students. What happened it was introduced by all universities, and Vice Chancellor’s salaries and perks rocketed. What a surprise!

    The government’s year long (why that long) enquiry into this issue, will not address this debt crisis, only tinker at the edges with a few minor amendments. How can the young begin to get on in the world with this amount of debt, before they even start work?

    • In Singapore, I believe that they have got a much better system. They charge high fees to go to university, covered by a loan. Once you graduate, 20% is written off each year that you work and pay taxes in Singapore. If you choose to disappear abroad, the debt remains.
      I would love to see a system like that in the UK, as any student could see that just by giving something back by working, the debt would disappear.

  2. The students going to university now are thinking the jobs market is the same as it was over forty years ago, when a degree was a ticket to a well paid career, that rewarded the hard work and the intelligence required to achieve it. However now the sysytem has completely altered, pay for jobs requiring qualifications (not just a degree) have gone into reverse, so that those jobs now are amoung the worst paid out there,not only that, but to now get a degree £30-40,000 of debt must be paid off, meaning the cost benefit analysis is skewed so much against the degree route it is simply staggering that there any students attending universities at all, and yet there are now record numbers!!!

    A work colleague of mine has just left and is now training to drive a trammel loader, there is a shortage of qualified drivers, he is expecting to earn £50-60,000p.a, if he just drives a Volvo waste bucket loader he can earn £200 a day – no degree required, people have just completely lost track of the differentials that used to exist decades ago between jobs and now think that an engineer with a degree earns £30-45,000 and that is normal, or a chartered accountant earns £35,-50,000 and that is normal – it isn’t. For those professions to have kept their buying power relative to the above jobs they would be two or three times the current salaries, then getting a degree would be worthwhile.

    It is much the same muddled thinking that applies to rising prices, people ask why is everything so expensive, why are prices rsing so fast? The price of the goods hasn’t changed, the value of the money buying them is constantly being devalued by central banks so it buys less and less each year.

    • Hi Kevin

      I have a friend who is an NHS physio as well as being involved in athletics and his ears may be about to burn as I was talking to him only 2 hours ago. New physios have degrees and study for masters but some have never manipulated a back for example and treatment is often simply telling someone what to do rather than involvement. Education is good but not everyone needs it.

      As to fees the bit where Nurses now have to take Student Loans seems insane to me. Whilst the example below may not be a lot it is in my view wrong on a group of people who are underpaid anyway.

      “Repayment terms are the same as for other students who have taken out a student loan at university. Graduates become eligible to pay back their loans in the April after they graduate, and then they will have to pay back only 9% of their earnings over £21,000 a year. Any outstanding loans are written off after 30 years. For example, a newly qualified nurse or allied health professional earning £21,700 would pay back £5.25 per month.” ( GOV.UK)

  3. As one of the now notorious Oxford PPE graduates who was paid to go to university and who left better off than he went in I can only sympathize with today’s students.

    However, I’m slightly cautious about the LSE figures. I’m not sure that saying that graduate pay has actually gone up in the last forty years says a great deal. it seems to me that we have a much more binary labour market. Whereas forty years ago there were many sub degree qualifications (apprenticeships; OND; HND) that people could take that seems to be much less these days so, back then, there was a more gradual pay gradient; today it is now much steeper. This may not be an argument in favour of graduates as more of an indictment against a system that has become binary in nature and denies huge numbers the possibility of advancement by means of intermediate qualifications.

    As to the amount outstanding of course a lot will never be repaid and will have to be written off. However, by that time I’m sure we’ll have, as one of many financial confiscation laws, one that passes the debt down to your heirs!

  4. At the current interest & inflation rates, a graduate needs to be earning about £50K per year before they start paying off their debt; until they get to that point, if they ever do, their debt continues to increase.
    All because the politicians didn’t want to call it a “tax”, even though that is what it is – at least until they decide to change the rules, that people seem to think are fixed, about writing it off after 30 years.

    • Hi DD

      Thanks for the link and I found this bit especially thought-provoking.

      “The increase in the “deficit” is wholly attributable to changes in the assumptions made in the process of technical valuation, at a time when the finances of the USS have substantially strengthened. The contrast between the healthy cash flow, investment performance and asset position of the USS, on the one hand, and the deteriorating actuarial assessment of the “deficit”, on the other, cannot be overstated.”

      Sadly though for the co-author Mervyn King the changes he is against occurred on his watch. Whilst it was not his exact area of responsibility it is a familiar tale from that time.

      • Thanks and I fully agree, DB pensions are another casualty of ten years of excessively low interest rates but Mark Carney will be long gone when the cost comes home (i.e. future generations poor retirement prospects). And where are the fourth estate to hold them to account?

  5. It seems to me that there are plenty of numbers that simply don’t add up:
    1. Student debt of £ 450 Bn which will never be paid back
    2. The cost of providing a defined benefit pension is rising to 36% of salary
    3. These recent students are supposed to pay the debt off, buy houses and then save for a pension.
    It isn’t going to end well.

    • Hi James

      The cost of some pension schemes is even higher as this from the Guardian in September 2016 shows.

      “In a detailed analysis of the Bank’s pension scheme circulated to the media on Monday, Altmann said its employer contributions exceeded 50%. “The Bank of England scheme required employer contributions of well over 50% of salary for the year ending February 2016. It also pays all the administration and [pension protection fund] costs, on top of the employer contributions. Such costs would be ruinous for most private sector employers struggling to fix their defined benefit pension deficits.””

      That may now be worse as its latest pension fund report shows a rise in contributions from £68.3 million in 2016/7 to £96.5 million in 2017/18.

  6. Great blog as usual, Shaun.
    One of the most appealing features of John Astin and Jill Leyland’s Household Inflation Index proposal was that it would incorporate student loans. This didn’t get incorporated in the ONS implementation of the HII as Household Cost Indices (HCIs) but we were told that ONS was still working on it. I’m sure getting a workable index is complicated, but not infeasible.The first and only publication of the HCIs only produced estimates to June 2017. Do you know what has happened to these indices and the plans to put student loans in scope?

    • Hi Andrew

      Yes I can help as there was a mention in the latest minutes of the technical panel tucked away in the AOB section.

      “Mr Payne discussed with the panel the possibility of holding an extra technical panel in November or December to allow us time to produce the next iteration of the Household Cost Indices in early 2019. In particular, this meeting will focus on the inclusion of student loans and capital costs. Panel members were supportive of this suggestion.”

      I hope they do as there have been enough Sir Humphrey style delaying tactics.

  7. University fees and student loans will one day be seen as being one of the greatest cons ever perpetrated against an entire generation.

    3 of my children obtained their tertiary education well away from the UK in order to avoid this con. Another one borrowed every last penny he possibly could – graduated and promptly left the country using money from student loans to purchase his air fare. He will not be returning, so good luck in getting any of that money back.

  8. I seem to remember Danny Blanchflower getting a bit of a pasting on Twitter defending vice chancellor pay, good work if you can get it I say. Any entity whether university, company or individual, the moment they’re financed by debt their salary goes through the roof. Lucky so and so’s. I got two out of three daughters through uni debt free so didn’t do too bad.

    Money, get back
    I’m all right Jack keep your hands off of my stack

    • Hi bill40

      In my experience Danny Blanchflower is a strong advocate for higher pay for any role he thinks he might get or has held. So

      Money, it’s a hit
      Don’t give me that do goody good bullshit
      I’m in the high-fidelity first class traveling set

  9. Lots of good points – almost certainly the vast majority of people going to University would be better off going straight into the workforce, not just because of the student debt aspects, but also because they would learn much more as employees. The current system is a weird mix of not very clear incentives for the youth – of course who wouldn’t want to gamble with someone else’s money that you get a good job at the end of it? And of course the Universities play on the fear that you will be left on the scrap heap if you don’t get a degree. But a bad degree is worse than no degree at all. I would rather make the system transparent in this way – everyone is given a lump sum at 18 – so 40k pounds. They can use this either to pay for a degree or to use for on-the-job training perhaps to subsidize their early years work. If they don’t use all of it by the time of retirement at 67 then it gets given to them as a lump sum, suitably compounded at say 10 year gilt yield. This gives people a positive incentive not to gamble on a degree. It also means that they can delay doing a degree or use it in other ways to get the training that they need.

  10. One item that is little discussed is the appalling collection rates for EU students. EU students have the same rights to a student loan from the UK as a UK citizen under EU rules. However, the UK has little by way of ability to ensure loans are repaid, particularly when students return to their home countries. Of course, much of this is legitimate too, because many fail to reach the repayment threshhold, as wages in their home countries are so much lower. I personally suspect that the size of such unpaid loans combined wth interest compounding will eventually rise to annual default rates that would exceed our former EU contributions. If that ‘bus’ is even partly true, goodbye NHS anyway, regardless of whether we are in or out.

    • That’s an excellent point Ham.It’s really incredible how bad the govt is at seeing these problems coming even when they have the data to hand-which we don’t.

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