Oliver Crampton

20th April, 2018

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The Student Loan Dilemma…

Anyone who started higher education after 1990 has been eligible for student finance. Those who have a student loan (and their parents for that matter) are likely to recall that first glance at a settlement statement from the Student Loans Company. These statements land annually, updating you on your position – how much you’ve paid off, and how much is left. It isn’t uncommon to see sums outstanding in excess of £50,000 these days. This is scary stuff!

However, a quick poll around the younger members of our team suggests they aren’t overly concerned about this debt. Perhaps they are just taking the stereo-typical millennial ‘head in the sand’ position? Previous generations would certainly have been unnerved by such numbers, and the psychology behind the debt. Perhaps however, the youngsters of today have taken ownership of the situation and have investigated the reality of how this loan might play out over the years ahead. They explained that in reality, because of the way the system works, the repayments won’t impact their standard of living and they may never have to repay the loan. Those who started university pre-2012 would certainly not consider repaying their loan unless they had considerable spare cash. The debt is so cheap, so why not just pay the interest? Borrowing long and low is the king of cashflow management strategies after all! For post 2012 joiners it’s a slightly different story however, because the interest rates on these loans are currently more than 6% per annum!

The parents view, in the main, is very different to our youngsters. They don’t want their children to be associated with debt and feel aggrieved that they must start their working life on the back foot; saddled with what appears to be a huge level of debt next to their name. This viewpoint is understandable given that much of this group either enjoyed government grants, their parents paid, or they simply didn’t continue their studies. The psychology of the baby boomers and Generation X (born between1965 -1980) has largely been to work hard to reduce debt as soon as possible … particularly those who were hit by the sky-high interest rates in the 1980s and early 90s. Of course, with debt at those levels, if you can get rid, then you must certainly do so. Borrowing high is not a sensible strategy over any timescale.

So, should those with student debts take them more seriously? 

Irrespective of your view and decision, it’s important to remember that student loans are very different to every other type of debt. The key differences are:

  • There is an expiry date on the loan; it ends 30 years after graduation, even if it’s not paid off!
  • If graduates earn over £25,000 per annum, they pay back at a rate of 9% of their gross salary over this level. So, should income be below £25,000 then there are no capital or interest payments to make. While interest will continue to accumulate on the outstanding loan, if you never earn above that amount again, you wouldn’t have to repay a penny! Now that sounds like a deal (at least for the student…).
  • Most students won’t pay 25% of their loan off based on the data we have to hand. Only the highest paid graduates will come close to settling their debts, the rest is mopped up by the everyday taxpayer.
  • The loan isn’t listed on credit records, so it won’t impact other borrowing significantly. Student loan repayments are considered when assessing mortgage affordability, which can reduce the amount you are allowed to borrow but does not impact borrowing as much as a credit card or regular loan repayment would for example.

So, those who started university before 2012 are in a more favourable position to those who started afterwards. The interest rate on these loans is generally considerably lower (around 1.5% interest per annum).  Even if those who joined after that date use disposable income to repay the debt, should their income drop in the future, they may never have needed to pay back a penny. The answer is therefore (on a mathematical and common-sense basis), that there are very few circumstances where anyone should repay their student debt sooner than required. We suspect this system costs more to administer than it makes back in interest, but hey, we don’t make the rules, we are just paid to make money work hard. In this case borrow low and long and don’t repay a penny more than you need to.

“This is all unfair to the everyday tax payer”, I hear you cry. Few could argue with this statement, however, the baby boomers and the Generation X brigade have enjoyed rising house prices and increased wealth from long-term home ownership. With this in mind, we should also remember that in real terms, it is now notoriously difficult on a comparative basis, for the younger generation to get on the housing ladder. Tying up all their capital to pay off student debt would only make the home ownership objective even more difficult to realise.

As with any debt, it is important to consider your individual circumstances and your longer-term objectives. Using excess income to assist your children with any more expensive/restrictive debt, saving for a house purchase or investing for short, medium and long-term objectives provides maximum flexibility and in many cases is a superior plan to that of paying off low risk debt.