Forget about student debt
Professor Nicholas Barr
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Name:Professor Nicholas Barr
Title: Guest ContributorOccupation: Professor of Public Economics at LSENicholas's Full Profile
Professor Nicholas Barr, Professor of Public Economics at LSE and a longstanding guest contributor on the OpinionPanel Commnunity, takes a look at governments’ total failure to explain university fees. Read his other posts here and here.
One of the worst features of the debate about paying for universities is that all governments have been woeful beyond belief in explaining how the system of student loans work.
Photo by Max Moreau
They have let the word ‘debt’ escape, and run round like a rabid ferret. So people think of student loan debts like credit card debts. They are not.
They are a payroll deduction, like income tax and national insurance, but smaller than either. A better way of thinking of the system is as a form of graduate tax, but one that does not last forever.
Before explaining, it’s a good idea to answer the ‘so what’ question, ie, why is going to university a good idea?
So why should I go to university?
The argument the Government gives for going to university is graduates generally earn more than non-graduates.
That is true, but it is only part of the story. When I meet my ex-students they are not all making shed-loads of money (though some are). But what stands out is most of them really enjoy their work.
Because people are living longer they will have to work longer – so you will be working for a long time.
So it’s enormously important to have a job where you don’t wake up on a Monday morning with a sinking feeling in the pit of your stomach.
Having a degree does not guarantee that – and of course many people without a degree also enjoy their work. But having a degree increases your chances of having a job that pays well and which you enjoy.
I may owe £40,000 when I’m done. Isn’t that scary?
If you put it that way, yes. But that is not the way to put it.
Here are the key points:
- The Government has been a total waste of space in publicising that loans have income-contingent repayments (for students starting in 2012 and after, repayments will be 9% of earnings above £21,000). If you earn £25,000 (about the national average) your repayment will be 9% of £4,000 = £360 per year, or £30 per month.
This year, someone earning £25,000 pays £292 in income tax per month and £177 in national insurance contributions. So loan repayments are like income tax in that low earners make low or no repayments, they are automatically related to the size of your pay packet, but are much smaller than income tax.
The only differences are the tax is paid only by people who have been to university and does not last forever (if you start university in 2012 or later, anything a person has not repaid after 30 years is forgiven). The table shows how this loan system would look under the new system.
Student loan repayments post-2012 Annual earnings £21,000 £25,000 £30,000 £50,000 Tax (monthly) £225 £292 £375 £834 NI (monthly) £137 £177 £227 £365 Loan repayments (monthly) £0 £30 £87 £217 - Thinking of student debt like credit card debt is filing it in the wrong bit of your brain. Repayments are like a capped graduate tax, so the right place to file it is as a payroll deduction like income tax and national insurance.
- Though £40,000 is large, it needs to be seen in proportion. If you think that owing £40,000 is scary, the really bad news is that over a full career, in cash terms, a typical graduate will pay the Government over a million pounds in income tax and national insurance. Any number can be made scary by adding it up over many years; think how much you will spend on food over the next 50 years.
If I want to buy something on credit after my degree, will my student loan be taken into account?
Yes, but that won’t be a problem. Lenders (mortgage, car, etc) are normally interested in your take-home pay, net of deductions like income tax, national insurance and loan repayments. The latter will reduce your borrowing capacity, but not by much since your monthly repayments are a relatively small fraction of earnings.
Remember that your income will generally be higher because you have a degree and lenders regard graduates as good risks. So a person’s borrowing capacity will generally be higher with a degree than without.
First published as a guest comment on Money Saving Expert, republished with the kind permission of Nicholas Barr and Money Saving Expert. The views expressed are not necessarily those of MoneySavingExpert.com.
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Whilst I agree that graduates may gain greater job satisfaction, I do not agree that we earn more on average. I have a 2.1 undergraduate degree and an MA; I earn 14k a year. This I blame the government for. I am a qualified Librarian by that I mean I have an MA in Information and Library Management (and yes to be a librarian you need a degree more likely an MA and then you need to charter) however as the government fails to value our profession, no matter how qualified we are, school librarians are more often than not paid the equivalent of an unqualified individual. They would never consider paying a teacher my salary, even an unqualified one so why is my professional qualification worth less they theirs?
Enough of me.
I also have many friends who graduated with good degree’s 2.1′s and 1st’s and yet either they are unable to find work or the work they find is exactly the same work they could have had for years if they dropped out of education at 18 possibly even 16. Ok this means that they do not have to pay a penny back but what is the point in that!?
The Government needs to focus in finding graduate’s jobs and training students so that they can find a job rather than promoting a lie which once was true but no longer is.
Cutting EMA in some ways needed to be done as I went to school with people who was attending just so they could receive their £30 EMA money every week. Which meant they was there not to learn, gain qualifications and further there careers. However, some students depended on there EMA to travel to school by bus, bye stationary etc in order to do well at school. It was one of those things which was always going to cause a stir. As for Cameron he just represents all what’s bad about the majority of politicians out of touch with the rest of society!
Cutting EMA and raising university fees was the worst step ever. David Cameron should never have become the prime minister.
In response to your comment below Emily Sesto you are in the same boat as my girlfriend, her parents earn above the threshold so she can not receive any financial help from the government/ student loan company in term of a grant or maintenance loan all she receive is the loan for her tuition fees. I do find this kind of strange your parents earn above the threshold but does not mean they are able to support you. University is not like school students are expected to become more independent, I am a 2nd year student and that is the major change between school/sixth form and university becoming independent. However I do wonder if you are still relying on your parents for money how are you suppose to be independent? This is something the government needs to address.
I also wonder just what we are paying for. University requires less hours than college and school did, we should pay for what we get. Even being at a very well respected university doesn’t change the fact that the money doesn’t seem worth it. My parents earn just over the amount that means we get no financial help. However, they’re money goes into the mortgage and bills, I get little help from them at all, I struggle to buy my food every week, there needs to be a better system in financial help to students.
I still think paying £225 back monthly is ridiculously scary. That will make a huge difference to earning, taking off over 2 grand a year. I have actually considered dropping out of uni as I don’t think I’ll be earning much more with a degree than without, the loan repayments sort of make up the difference between earnings of those with and without a degree.
Greetings,
Thank you for your comments. A few further thoughts.
1) I am assuming that we are all deeply serious about widening participation. Thus the disagreement is not about What, but about How?
2) Since I know that many people are sceptical about economic theory, which is a mixed bag – I am happy to give considerable credence to some theory, while joining the sceptics about other often-misused theory – let me focus on the evidence.
3) What stops people from disadvantaged backgrounds going to university? All one’s instincts and intuition say that it’s fees. But what the evidence shows is very different – that what stops people from poor backgrounds going to university is the lack of decent A levels or equivalent, i.e. they never even make it to the starting gate. Why not? Because of a mix of crummy schools, lack of encouragement at home, lack of money driving them to leave school at 16 to earn money, lack of aspirations and/or lack of information. A further strand of evidence shows the crucial importance of early child development.
4) Thus the right policies to widen participation start MUCH earlier than 18. They include (a) more and better nursery education, e.g. Surestart, (b) improving school outcomes through things like the literacy hour and numeracy hour, (c) more and better information at the start of secondary school about choice of subjects for GCSE, etc., (d) policies like AimHigher and mentoring by university students to raise aspirations and (e) EMAs, which give financial support to allow people to stay on after age 16.
5) Evidence 1: in 2002, when people from poor backgrounds paid no fees, 81 per cent of children from professional backgrounds in England went to university, compared with 15 per cent of of children from manual backgrounds – a shameful record, and figures largely unchanged over the 40 previous years when there were no fees and, for most of the period, maintenance grants.
6) Evidence 2: the 2006 reforms introduced fees fully covered by loans. The fees-harm-access argument predicts harmful effects on participation. What happened? The following quote is from a study by the Higher Education Funding Council for England (http://www.hefce.ac.uk/pubs/hefce/2010/10_03/10_03.pdf)
‘ … there is no indication … that changes to HE [higher education] tuition fees or student support arrangements have been associated with material reductions in the overall HE participation rate’ (para. 23).
‘Substantial, sustained and materially significant participation increases for the most disadvantaged areas across the 04:05 to 09:10 cohorts are found regardless of whether educational, occupational or income disadvantage is considered. Typically, young people from the 09:10 cohort living in the most disadvantaged areas are around +30 per cent more likely to enter higher education than they were five years previously (04:05 cohort)’ (para. 28, emphasis added).
‘Trends in social statistics – such as HE participation rates – that are associated with deeply rooted differences in advantage do not usually show rapid change. A set of robustness and credibility checks give confidence that the analysis in this report is faithfully describing HE participation trends. In particular, the unusually rapid increases in HE participation recorded since the mid-2000s for young people living in disadvantaged areas are supported by changes in the GCSE attainment of the matching cohorts of young people ….’ (para. 31, emphasis added).
Why did participation improve by a staggering 30% over a time as short as 5 years? Because (a) fees were covered by loans, so that students rightly faced no upfront cost of fees and (b) because from 1997 onwards, the Labour gov’t introduced precisely the policies outlined in para. 4 – Surestart, literacy and numeracy hours, EMAs, Aimhigher. Thus the improvement in GCSE results matched the improved participation in HE.
7) My argument against ‘free’ higher education is twofold. First, it spends money on policies that do not work (e.g. the 2002 data cited above). Second, ‘free’ is just another word for ‘someone else pays’, which is entirely right for school education and the NHS, but deeply wrong (value judgement) when those who go to university are disproportionately from better-off backgrounds, getting a degree that will preserve their position.
8) Of course there is a role for support at 18+, but it needs to be carefully designed, and is the tail, not the dog.
9) None of that means that I support the 2012 reforms – I don’t. My assessment of the reforms (and all the surrounding theory and empirical evidence) is in N. Barr ‘The Higher Education White Paper: The good, the bad, the unspeakable – and the next White Paper’ (Social Policy and Administration, Vol. 46, No. 5, October 2012, pp. 483–508). The bad includes the abolition of taxpayer support for teaching in the arts and humanities, and the social sciences; the unspeakable refers to the cuts to Surestart and the abolition of EMAs and Aimhigher.
Regards
Nick Barr
Doesn’t take long before the insults start flowing – demonstrating the truth of BP’s very first sentence. What BP could “happily take”, or not take, is irrelevant.
The fact is – teenagers *are* being lumbered with huge amounts of debt. The only debate seems to be the weasel words designed to hide this from them.
Why would BP even begin to try to guess the amount of tax the OP pays or has paid? And what difference would this make to any argument?
BP seems to ignore the fact that the more a graduate earns, the more they will pay in tax anyway, without the added debt payment.
Now this has descended to a lower common denominator, it’s time to withdraw from any attempt at a reasonable discussion. Cheers.
I’ve been trying to explain this to people for so long I wonder whether they are actually fit to go to university, thank you Nicholas Barr.
I could happily take student loans of ANY amount wether it is £40,000 or £40,000,000, at whatever rate of interest, because I know that I will only have to pay for the VALUE OF MY EDUCATION. In other words, if my education was worth £40,000 (plus interest) to me, I would end up earning enough to pay off that amount, if I don’t earn enough to pay off my loan, then my loan isn’t actually that amount.
To suggest that teenagers are being lumbered with huge amounts of debt is absurd. If the teenager becomes an adult earning less than £21,000 per year, heorshe pays nothing: hisorher education was worthless, but at least heorshe got 3 years of free living that heorshe will never have to pay back. If instead the teenager later earns £22,000 say (for ease of calculation) heorshe will pay back £90 per year: after the 30 years of paying this back heorshe has paid only £2,700 of hisorher debt, or rather, heorshe only ever had £2,700 of debt. Three years of living and a university education for £2,700? Absolute bargain. If I earn more, then mine are the broader shoulders and I have a moral duty to pay more.
Student Debt should not be calculated from the beginning of a person’s career, but from that point when heorshe has finished paying. In this way, the student fees and interest rates are irrelevant until a person is earning such a high amount that they should be grateful that their education was so valuable.
Student Debt is a tax on the wealthy, and the only GREED involved is that of those who believe that the country owes them a free university education.
And just to keep things clear, this is not the inane ramblings of a richboy whose mummy and daddy will take care of the money. My parents could afford to contribute little more to my education than occasional train tickets and a place to live during the breaks. I took the full amount of the student loan available because I actually understood what I was getting. Yes, my student fees were less per year, but unless we start talking silly money, I will probably be paying more for my education than you will (repayments start at £15,000 for me, enjoy your extra £540 per year tax cut!)
I disagree – I owe them money – it’s a debt. It doesn’t matter how you play around with the wording and try to hide the real numbers, that doesn’t change how much I owe. Nor does it mention how much I will be paying in interest on this debt. – nor does matter that it’s less than a commercial loan, again, you can compare all you want, because the debt remains a debt.
You seem to think that because this is likely to be the first debt that students have encountered, that you can whitewash the reality and pretend that this debt is something other than it is – a huge burden put on the shoulders of teenagers, so that someone, somewhere makes money from them.
This is, in my opinion, no way to treat young people in this country – ie put them into a huge debt before they’e even started to earn, and charge them, since 1998, “Bank of England base rate plus 1%”.
The new debts are even more onerous, “…while you are studying, the interest rate on your loan is the rate of inflation plus 3%;” A comment on,
http://www.guardian.co.uk/education/2012/aug/28/interest-charged-on-student-loans,
sums it up nicely, “The general rate of RPI inflation plus 3%, at the current RPI, implies a doubling of the amount owing every nine years. A pretty bad deal, I would say!”
So the debt is racking up due to excessive interest rates, – read ‘greed’ on someone’s part – before you can even start to think of repaying it.
The entire racket is to make money from students, and get them used to being in large amounts of debt, for a very long time, so that future debts will seem ‘normal’. The interest garnered from students will keep some people somewhere in clover for a very long time, and it certainly won’t be the students themselves.
I suggest future students look to Europe for their degrees, and certainly for any further degrees.
What am I doing about it? I’m selling up in the UK, so that I can pay off my and my childrens’ student debts, and I’m encouraging them to join me in taking their talents abroad, and leaving Rip Off Britain far behind.
Greetings,
Apologies for slow reply — start of the academic year is always crazy. A few brief responses.
1) Who should pay for higher education? Somebody has to pay. Who? Taxpayer finance for schools and NHS makes sense for many reasons, not least because we all use them and, for the most part, have no choice about using them (e.g. mandatory school education). With higher education (a) people can choose whether or not to go and (b) those who choose to go are disproportionately from better off backgrounds. In a system that relies entirely on taxpayers, the truck driver is paying for the degree of the Old Etonian. That’s not fair. If you don’t believe me, look at this article by Peter Wilby, a long-time socialist writer (http://www.guardian.co.uk/education/2010/mar/30/university-tuition-fees)
2) How should they pay? It is fair that the beneficiaries (i.e. graduates) should share some of the costs. Parental contributions do not work well, particularly for students from poor backgrounds. Students’ earnings while a student are at the expense of study and leisure activities. Credit cards charge horrible interest rates and create an appalling debt spiral. The government loan system does NOT have fixed monthly repayments, but monthly repayments that are a fraction of his or her earnings, i.e. a payroll deduction like income tax or national insurance but smaller than either. It is deliberately set up that way.
3) Is it debt? At a Beatles press conference, Ringo was asked what he called his haircut. He said, ‘Arthur’ — i.e. you can call something whatever you like. Of course, a student loan is debt. My point was that it’s NOT debt like credit card debt, but a payroll deduction. The system is like a graduate tax, except that for many graduates it does not go on for ever, but stops once the person has repaid his/her loan. I sometimes ask parents if they lie asleep worrying about their child’s future tax bill — and they goggle at me as if I were slightly batty. On the other hand they (and I) would have sleepless nights over large credit-card debts.
4) What interest rate? The market interest rate on unsecured debt is the credit card rate. The market interest rate for a risk-free debt is the government’s long-run borrowing rate. The UK student loan over the long-term gives students access to borrowing at the government’s risk-free rate. That’s a much better rate than they could get anywhere else — and it’s precisely the point of the loan scheme that students have access to that interest rate. The obvious question is why not lower still? The answer is that blanket interest subsidies do not help low-earnings graduates (who are protected by income-contingent repayments and 30 year forgiveness) — the main beneficiaries are successful professionals in mid-career, i.e. the very last group of people who should be helped. (If you want me to stand that argument up, get back to me and I’ll give more detail).
5) Where does the money come from and who benefits from the interest rate? The money that students borrow comes from the taxpayer and the repayments go back to the taxpayer. Thus the repayments of past borrowers help to finance the loans of today’s students.
6) What about access? The argument that fees harm access is intuitively obvious — but very largely wrong provided that there are loans to cover fees. What the evidence shows is that the major impediment to access is lack of attainment in school, i.e. decent A levels. Lack of attainment has its roots in (a) poor schools, (b) lack of information, (c) low aspirations. Thus the policies that REALLY help to widen participation are earlier in the system — that’s why it is utterly shameful that the gov’t has abolished policies like Education Maintenance Allowances and AimHigher, and cut funding for nursery education.
Happy to discuss — shedloads of writing if you want more.
Regards
Nick Barr
Thank you for your response.
I’ll keep it brief.
1 and 2. Graduates will pay extra income tax as their salaries will be above the average for non-graduates. This is the money which should be used for their education. Not an extra interest-laden debt on top of that.
3. It is a debt. No matter the details, no matter what it’s like, or not like.
And we both know that any answer can be obtained by asking the question phrased in a certain way, so what keeps parents awake at night is irrelevant.
4. Rate of interest compared to other debts is not relevant. Young people should not be milked for extra money above the RPI as a maximum.
5. As 1 and 2 above – it’s a bit of a roundabout argument about the taxpayer benefitting when the student will turn into the tax payer – a great deal of unnecessary wasted time and effort and actual money will be spent administering a scheme which will see students borrowing money from their future selves as taxpayers and, by your argument, the repayments going back to them, again as taxpayers.
Also, this argument is like the road tax one – once money is extracted from the people, it goes into the govt’s coffers, with no guarantee that the taxpayer who coughs up will ever see the benefit again.
If this argument (taxpayer benefits) is used, then it should operate as a closed system, which would make it a lot cheaper to administrate, cost the student a great deal less in the long run, and keep the vagaries of various governments out of the equation.
6. ‘What about access’ in this discussion? Incurring debts does not encourage access to anything.
I think we shall agree to disagree, as I have heard no arguments which mitigate my deep concerns about lumbering young people with very large debts. But thank you for your time in responding!
As a postscript, if this approach continues, I foresee a future where all education will have to be paid for by those enrolled in it, and UK children will find themselves incurring debt from Nursery onwards. Actually, that may not be quite accurate – Scotland and Wales won’t be going down that road, so, I correct that to, “English children will find themselves incurring debt from Nursery onwards”.