You can accumulate one hell of a lot of debt these days in the UK. Just in an undergraduate degree, fees are £9,000 per year plus you can get another £10,702 in maintenance loans per year of you’re studying in London. Over a three-year degree that’s £59,106 or a tad over $100,000 (yes, really). So, at face value one can understand the spate of stories coming out of the UK these days talking about how their massive debt loads are going to paralyze them for life, stop them being able to buy housing etc.
Except, wait – these are income contingent loans, not mortgage-style loans. The maximum payment you have to make in any given year is 9% of marginal income over 21,000. And the debt incurred doesn’t necessarily need to be paid back. Loans are forgiven after 25 years, regardless of how much you have repaid. Estimates vary, in part because it depends on what discount rates one chooses and in part because the government criminally keeps messing with the terms of the loans, but at the moment it is expected that between 25 and 40% of student loan balances will never be repaid and a higher proportion of students (perhaps 50%) will receive at least some forgiveness on their loans. For those who do not repay their loans, the UK loan system is more like a tax than a loan – a 9% surtax on income over 21,000 which lasts for 25 years after graduation (more on that here).
Despite massive nominal debts, students simply aren’t facing massive repayment burden. A graduate making 30,000 is only repaying 810 per year, or about 3.1% of after tax income, which is a heck of a lot less than the amount that the average Canadian graduate with student loan debt is paying (our grads pay close to 8% of after-tax income on average). And they’re paying that regardless of how big their debt is, which is not true in Canada either: at any given level of income over $25,000 per year, Canadian student loans borrowers’ rise along with the amount of debt they have up to a maximum of 20% of family income.
(If you’re wondering how that works – how UK loans can be so big and yet borrowers repay so little – it’s precisely because the government expects quite large losses on the program. Student loan burdens are easy to reduce if you’re prepared to go to extreme lengths to subsidize them).
The point of income-contingent loan systems like those in the UK, with their guarantees, their maximum payments and their generous forgiveness systems is precisely to do everything possible to make life easier for borrowers, to ensure that their student loan debts are not going to affect their ability to borrow for other things later on.
But perception is everything. If graduates feel that their large debts constrain their ability to do make certain life choices like buying a house even though (technically) they don’t, then can we say the policy is actually working? There’s an interesting side point here. When deciding on applications for mortgages or other types of consumer debt, it’s unclear whether banks in places like Australia and UK actually treat income-contingent student loan debt differently than Canadian and US banks treat mortgage-style debt. They should, but apparently nobody knows for sure because no one’s ever checked – not that banks would necessarily fess up if they didn’t.
Now, I’m not saying that these stories coming out of the UK are in fact true; people in opposition to government policies will tend to come up with whatever argument sounds good at a particular moment. But even if such views aren’t widespread, the point raised is a good one. Student loan policy wonks have always assumed that if you provide guarantees and limit liability/risk on student loans, then students will be ok with debt. But if the facts of the policy don’t change people’s attitudes about risk, then the policies will fail, no matter how well they deal with the actual problems at hand.
But what’s the alternative? It’s a bit of a scary thought.