Student loans: what went wrong?

MPs from the Commons business, innovation and skills select committee are sounding the alarm after finding out that government forecasts suggest that around 45 per cent of student loans taken out will never be repaid.

Under the current system, students can borrow to cover the full cost of £9,000-a-year tuition fees, and do not have to start paying back their loans until they have finished studying and are earning above £21,000 a year. Any outstanding debt is written off after 30 years.

But the number of former students defaulting on the debt means we are rapidly approaching the tipping point where the scheme will no longer be financially viable.

Consultants London Economics have said that if the default level reaches 48.6 per cent, the government will get back less money than it would have made under the old system, before tuition fees were trebled from £3,000 a year to £9,000.

The MPs’ new report suggest the government has an unenviable track record of underestimating the size of the repayment problem, and has failed to listen to experts who made more accurate forecasts.

The original government projection was that 28 per cent of loans would have to be written off, but ministers kept revising the figure upward.

The department for business, innovation and skills (BIS) strongly disputed a projection of 40 per cent made by independent experts from the Higher Education Policy Institute (HEPI) – before being forced to concede that the think-tanks estimates had proved to be more accurate.

The number has been revised because economists have downgraded their predictions of how much graduates are likely to earn in the future.

The National Audit Office predicts that student debt will increase from £46 billion in 2013 to about £330 billion by 2044.

Are EU students to blame?

Several newspaper reports have sought to pin some of the blame on foreign students who never pay back loans.

Under EU rules, European students who go to British universities must be offered loans on the same terms. But evidence suggests many neglect to pay the money back after returning to their home countries.

In an answer to a Freedom of Information request in April 2012, the Student Loans Company (SLC) published a table showing the amount of arrears owed by graduates from various countries.

Students from Cyprus had borrowed £24m from the British taxpayer, and about £15m was still outstanding. Students from France, Germany and Poland had all borrowed more than £10m, and had failed to pay back about £6m, £4m and £3m respectively.

The company was not able to offer an immediate update to these figures, and MPs said that senior witnesses from BIS, HMRC and the SLC had all been unable to tell them how much is currently owed by EU students and British graduates living abroad.

SLC figures show that more than a third (37 per cent) of foreign students have either been placed in arrears are or not paying and “further information is being sought”. The figure for UK and EU students combined is just 2 per cent.

Despite the fact that EU students are more likely to be not paying any money back, the numbers involved are small – just 14,600 people.

The National Audit Office said: “While recognising this group is small compared to the total number of borrowers, the SLC could take a more targeted approach to collection of these arrears.”

‘Misleading’ targets

The business committee also criticised BIS over the way it sets out its repayment targets for the Student Loans Company (SLC).

The company is supposed to have 98.5 per cent of borrowers in a repayment channel – which means they are either repaying on time or not earning enough to repay.

But the SLC is allowed to include people in that total, even if they don’t have any information on them.

The National Audit Office has called the system “potentially misleading”, which MPs today said was a “damning finding”.

Value for the student?

The Institute of Fiscal Studies has predicted that the average student will now leave university with about £44,000 of debt, in 2014 prices, compared to about £25,000 under the old system.

Although the lowest earners will pay back less, far fewer graduates will pay off their debt in full by the age of 40, and almost three quarters will never earn enough to pay back their loans in full.

Last year the Intergenerational Foundation compared the UK university system to the OECD group of leading economies.

Finish

It found that students were being charged twice as much interest on student loans as the OECD average. In fact, England had the highest rate of interest on state-backed student debt of any country in western Europe.

Tuition fees were higher in England than any public university system in the world. When other living costs were factored in, the costs faced by students were the third highest in the world.