Student Loans in the United Kingdom with Lessons for the U.S. System
The student debt crisis isn’t restricted to the United States. Graduates in other Western countries also struggle with the cost of their college educations.
While student loan systems differ substantially between nations, the situations in other countries provide useful contrast to the state of student debt in America.
The United Kingdom has seen major changes in higher education finance over the past several decades. In fact, prior to 1998, most British students did not have to take out student loans at all. Education at public universities were tuition-free. More recently, following the adoption, and gradual increase, of tuition fees, loans have become a more prominent feature of British higher education.
In fact, British students graduate with much higher average debt than their American counterparts. As of 2019, it is the highest worldwide.
However, repayment is generally less onerous, as it is made through an income-contingent dependent payroll tax. This ostensibly ensures that low-income graduates are not unduly burdened. By most estimates, a majority will likely never pay the full balance, as loans are forgiven after 30 years across the board.
Nonetheless, as tuition prices have crept up and income thresholds for realistic repayment have only marginally kept pace, there is growing concern among prospective students that their debt burdens will, like those of their much-discussed American compatriots, become unsustainable.
A Brief History
Until 1998, tuition at public universities was free in the United Kingdom. In 1962, maintenance grants were introduced in order to assist students with living costs as necessary and maintenance loans were introduced in 1990. These loans were administered by the government-owned Student Loans Company (SLC).
In 1997, the National Committee of Inquiry into Higher Education issued a report calling for the institution of tuition fees.
The following year, some of the report’s recommendations were implemented and the cost of tuition shifted to students up front. The next year, maintenance grants were eliminated. This was in large part a response to increasing college enrollments, which became impossible for the state to subsidize despite caps on per-university enrollment instituted in 1994. In the previous decade, they had almost doubled.
In the early years, following this shift away from free higher education, tuition costs still remained relatively low. Initially, tuition was set at a maximum of £1,000 and a system of income-contingent loans was set up by the SLC to assist students in financing their educations.
Maintenance grants were reintroduced in 2004.
By 2006, tuition had risen to a maximum of £3,000. However, following this increase, borrowers were not expected to pay up front, with payment deferred until after graduation on an income-contingent system. Students did not have to begin repayment until they began making at least £15,000 a year and paid 9% of their income above that amount toward the balance. Interest was set at the rate of inflation and the balance was forgiven after 25 years.
Six years later, maximum tuition was raised to £9,000 a year. Graduates did not have to begin repayment until they began making £21,000 a year or more. Interest rates were revised in alignment with the Retail Price Index (RPI), with a maximum of an additional 3% for students making over £41,000 a year. The additional percentage was scaled down for those making less.
Though the repayment threshold was meant to have been gradually increased, it was frozen at £21,000 in 2015 for students who had matriculated in 2012 or after. Maintenance grants were eliminated again in 2016.
From 2018, maximum tuition was raised to £9,250. And, following outcry over the 2015 decision, the repayment threshold was raised to £25,000. In 2019, it was raised again, to £25,725. Repayment remains at 9% of income above the threshold.
Northern Ireland, Scotland, and Wales operate using slightly different systems than England, with Scotland being the only constituent country still offering free tuition to residents. Northern Ireland has a maximum tuition of £3,925 and Wales caps it at £9,000.
The government sold off some £1.7 billion of its loan portfolio to a private holder in 2017 and a further £1.9 billion in 2018. The sales were made for significantly less than the face value of the loans due to the likelihood that many would never be repaid.
British citizens and residents of at least three years are eligible to apply for loans, as are refugees and children of Swiss nationals and Turkish employees.
English students apply through the SLC’s website, where they must submit proof of identity and household income. Irish, Scottish, and Welsh students apply through their country-specific programs.
Undergraduate students can take out up to £9,250 in tuition loans for public universities and £6,165 for private universities. Students attending school in London and not living at home can take out up to £11,672 in maintenance loans, with lower amounts available to students outside of London and to students living at home.
Maintenance grants remain available to students who started their coursework before August 2016 and to students in Northern Ireland, Scotland, and Wales.
Loans are also available to masters, doctoral, and part-time students at amounts appropriate to their differing costs.
The Current State of Debt
The average bachelor’s degree graduate in the UK holds around £44,000 in debt upon leaving school per a 2014 report. A 2017 analysis by the Institute for Fiscal Studies added a further £6,800 to that sum, yielding an average of £50,800 (about $64,500). That is around double the amount held by the average American graduate. Lower-income graduates may hold as much as £57,000 in debt.
Around £16 billion is loaned to students every year. Outstanding loans stood at around £121 billion by mid-2019. Over 8 million graduates hold debt with the SLC.
Universities have become increasingly reliant on these fees, with some 40% of their income resulting from tuition charges in 2017. However, most of these funds are unlikely to be repaid. A 2017 study projected that some 83% of students will not have paid off the balance of their loans before they are forgiven in 30 years. (The UK Office of National Statistics projected a somewhat lower figure of 45% in 2018.)
As such, the accounting practices applied to student loan debt by the government were changed in 2018. Previously, the interest on borrowed funds were treated as revenue. Following the revelations of this financial sleight of hand, around £12 billion was reclassified as spending, rather than revenue. The UK government will likely have to borrow in order to make up the difference.
In 2018, the economic affairs committee of the House of Lords estimated that student loan debt would grow to over a trillion dollars, matching current U.S. debt, in the ensuing 25 years.
More students who take out loans drop out of school than those who don’t. And, as with U.S. graduates, loans have been found to be limiting factors in marriage, home ownership, and retirement saving.
Further, some 60,000 graduates, including British citizens and EU residents, have apparently abandoned their debt, leaving around a billion pounds unaccounted for.
Repayment plans vary according to when students began their programs and which programs they entered.
Graduates on Plan 1 are English or Welsh students who started their undergraduate programs in September 2012 or before and Scottish or Northern Irish students who began their programs in September 1998 or before.
These graduates pay 1.75% interest. Repayment starts when debt holders begin making £18,935 (about $24,000) a year. The threshold will rise to £19,390 in 2020. They pay 9% of everything over that threshold.
Graduates on Plan 2 are English or Welsh students who started their programs after September 2012.
These graduates pay interest at the rate of inflation while they are studying and after graduation when they make £25,725 or less (about $32,700). They pay 9% of everything over that threshold, which will rise to £26,575 starting in 2020. When they make over that amount, they may pay up to 3% in interest in addition to inflation. Anyone making £46,305 (£47,835 from 2020) or more pays 3% in addition to inflation.
Policies vary for Scottish, Welsh, and Northern Irish undergraduate loans, depending on their country of origin and the location of their alma maters. Generally, tuition and therefore loan costs are less in the student’s home country. If they study outside their home country, they pay a maximum of £9,250.
Postgraduate loan holders are those who began master’s degrees after August 2016 or those who began doctoral degrees after August 2018. The repayment threshold for these debtors is £21,000 a year and loans accrue interest at the rate of the RPI plus 3%. They pay 6% of their income above that threshold.
Loans are forgiven after 30 years of repayment if the balance has not been paid off by that point.
There is no penalty for early repayment. And, unlike the American system, dereliction on repayment does not show up on the credit reports of debtors. Repayment ceases temporarily when the loan holder becomes unemployed or drops below the income threshold. Loans are forgiven in some cases of disability and upon death.
Recent Developments and Implications
Much of the recent criticism of how student loans are handled in the UK has revolved around how they are accounted for in terms of government spending. With the 2018 decision shifting £12 billion in student debt to the deficit column due to the likelihood that it will never be repaid, major questions have been raised as to the sustainability of the system.
A 2019 study found that students from higher-income backgrounds were far less likely to take out loans, suggesting that the debt system created a further disadvantage for lower-income students.
A 2015 report from the Political Economy Research Centre found that lower- and middle-income students are disadvantaged by the system, as they are ultimately in debt for longer and end up paying more due to interest. The Independent Commission on Fees found in 2015 that low-income students repay on their loans an average of four years longer than those from more privileged backgrounds.
In 2017, a YouGov poll found that a full third of graduates felt that their degrees weren’t worth the cost.
Further, drops in enrollment in vocational training have raised questions as to the efficacy of current funding for students interested in trade school.
Some have called for revisiting the idea of increased grant-based aid across the board.
Still, for all its imperfections, the UK system provides some useful principles that might reasonably be applied to the struggling U.S. system. Limiting the amount of loans, and automatically enrolling students in income-contingent repayment plans and payroll withholding of student loan payments might go some way toward alleviating the crushing debt burdens of future graduates. And the UK’s difficulties in sustaining a free education system prior to 1998 also sounds a cautionary note for Americans advocating the same.