Following a report from the Institute of Fiscal Studies earlier this year, it was revealed that over 70% of students who left University in 2016 are expected never to repay their student loans in full. These figures suggest that future university graduates will be in a similar position: saddled with “debt” that they will never actually have to repay. With this in mind, why does the concept of student debt create such psychological stress for current and future students alike?
The answer is simple: we know how to get in to debt, but we don’t know how to get out of it. Martin Lewis, the founder and chair of MoneySavingExpert.com, has been trying to tackle the anxiety students feel regarding student borrowing as the head of the Independent Student Taskforce, providing free advice and information to students in an attempt to bring clarity to the chaotic student finance system.
In his opinion, student loans are,
“the best type of lending you’ll ever get”
for several reasons. Firstly, the amount you repay is proportional to the amount that you earn; graduates only have to make repayment contributions of 9% on the money that they earn over the £21,000 threshold, therefore you will only ever have to start repaying the loan if you earn enough to do so. Moreover, regardless of how much you borrow, the 9% repayment remains the same. For example, if one student has borrowed £27,000 and another student has borrowed £100,000, providing that they are both earning the same amount of money (e.g. £31,000) then both will only have to repay £900 annually.
Secondly, in light of the recent research from the Institute of Fiscal Studies, the majority of borrowers will never be able to repay the original borrowed capital figure. In this scenario, not only does the borrower not have to repay their pay their student loan, they also do not have to pay the current 6.1% interest on the loan. Furthermore, the 6.1% interest rate isn’t fixed and is instead proportional to your earnings, meaning that for some people, the loan will be interest free and for other the interest rate will vary as the higher your income the higher your interest rate. It is important to note that no borrower has to start paying interest until they have repaid the initial capital borrowed in the first place. Ultimately, student borrowers will only ever have to repay what they can afford.
The concept of student debt is deceptive. In theory, students have borrowed money as a loan which they must repay with interest. In practice, the repayment of student “debt” functions in a similar way to income tax, in that repayments are proportional to income. Furthermore, unlike other forms of debt, the loan is written off after 30 years with no record of borrowing on your credit files, meaning that the loan has no subsequent effect on your credit rating. Overall, we should see student loan repayment as a type of tax instead of a crippling liability. We shouldn’t fear student debt; although the concept of a government charging its citizens for education truly is distressing, loan repayment doesn’t have to be.
Julia Constable
Image: [debt.org]