Student Loans in the United Kingdom with Lessons for the U.S. System

Richard PallardyBy Richard PallardyBy Savingforcollege.com

The student debt crisis isn’t restricted to the United States. Graduates in other Western countries also strugglewith the cost of their college educations.

While student loan systems differ substantially between nations, the situations in other countries provide usefulcontrast 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, priorto 1998, most British students did not have to take out student loans at all. Education at public universities weretuition-free. More recently, following the adoption, and gradual increase, of tuition fees, loans have become a moreprominent feature of British higher education.

In fact, British students graduate with much higher average debt than their American counterparts. As of 2019, it isthe highest worldwide.

However, repayment is generally less onerous, as it is made through an income-contingent dependent payroll tax. Thisostensibly ensures that low-income graduates are not unduly burdened. By most estimates, a majority will likelynever 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 keptpace, there is growing concern among prospective students that their debt burdens will, like those of theirmuch-discussed American compatriots, become unsustainable.


A Brief History

Until 1998, tuition at public universities was free in the United Kingdom. In 1962, maintenance grants wereintroduced in order to assist students with living costs as necessary and maintenance loans were introduced in1990. 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 callingfor the institution of tuition fees.

The following year, some of the report’s recommendations were implemented and the cost of tuition shifted tostudents up front. The next year, maintenance grants were eliminated. This was in large part a response toincreasing college enrollments, which became impossible for the state to subsidize despite caps onper-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 relativelylow. Initially, tuition was set at a maximum of £1,000 and a system of income-contingent loans was set up by theSLC 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 expectedto pay up front, with payment deferred until after graduation on an income-contingent system. Students did nothave to begin repayment until they began making at least £15,000 a year and paid 9% of their income above thatamount toward the balance. Interest was set at the rate of inflation and the balance was forgiven after 25years.

Six years later, maximum tuition was raised to £9,000 a year. Graduates did not have to begin repayment untilthey 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 wasscaled down for those making less.

Though the repayment threshold was meant to have been gradually increased, it was frozen at £21,000 in 2015 forstudents 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 repaymentthreshold was raised to £25,000. In 2019, it was raised again, to £25,725. Repayment remains at 9% of incomeabove the threshold.

Northern Ireland, Scotland, and Wales operate using slightly different systems than England, with Scotland beingthe 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 £1.9billion in 2018. The sales were made for significantly less than the face value of the loans due to thelikelihood that many would never be repaid.


Application Process

British citizens and residents of at least three years are eligible to apply for loans, as are refugees andchildren of Swiss nationals and Turkish employees.

English students apply through the SLC’s website, where they must submit proof of identity and householdincome. 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 forprivate universities. Students attending school in London and not living at home can take out up to £11,672in maintenance loans, with lower amounts available to students outside of London and to students living athome.

Maintenance grants remain available to students who started their coursework before August 2016 and tostudents in Northern Ireland, Scotland, and Wales.

Loans are also available to masters, doctoral, and part-time students at amounts appropriate to theirdiffering 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 2014report. A 2017 analysis by the Institutefor 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 holdas much as £57,000 in debt.

Around £16 billionis loaned to students every year. Outstanding loans stood at around £121 billion by mid-2019. Over 8million graduates hold debt with the SLC.

Universities have become increasingly reliant on these fees, with some 40% of their income resulting fromtuition charges in 2017. However, most of these funds are unlikely to be repaid. A 2017 study projected that some 83% of studentswill not have paid off the balance of their loans before they are forgiven in 30 years. (The UK Officeof National Statistics projected a somewhatlower 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 thisfinancial sleight of hand, around £12 billion was reclassified as spending, rather than revenue. The UKgovernment 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 growto 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 abandonedtheir debt, leaving around a billion pounds unaccounted for.


Repayment

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 inSeptember 2012 or before and Scottish or Northern Irish students who began their programs inSeptember 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 thatthreshold.

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 graduationwhen they make £25,725 or less (about $32,700). They pay 9% of everything over that threshold, whichwill rise to £26,575 starting in 2020. When they make over that amount, they may pay up to 3% ininterest in addition to inflation. Anyone making £46,305 (£47,835 from 2020) or more pays 3% inaddition to inflation.

Policies vary for Scottish, Welsh, and Northern Irish undergraduate loans, depending on their countryof origin and the location of their alma maters. Generally, tuition and therefore loan costs areless 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 begandoctoral degrees after August 2018. The repayment threshold for these debtors is £21,000 a year andloans accrue interest at the rate of the RPI plus 3%. They pay 6% of their income above thatthreshold.

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 repaymentdoes not show up on the credit reports of debtors. Repayment ceases temporarily when the loan holderbecomes unemployed or drops below the income threshold. Loans are forgiven in some cases ofdisability and upon death.


Recent Developments and Implications

Much of the recent criticism of how student loans are handled in the UK has revolved around howthey are accounted for in terms of government spending. With the 2018 decision shifting £12billion in student debt to the deficit column due to the likelihood that it will never berepaid, major questions have been raised as to the sustainability of the system.

A 2019 studyfound 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.

A2015 report from the Political Economy Research Centre found that lower- andmiddle-income students are disadvantaged by the system, as they are ultimately in debt forlonger and end up paying more due to interest. The Independent Commission on Fees found in2015 that low-income students repay on their loans an average of four years longer thanthose from more privileged backgrounds.

In 2017, aYouGov poll found that a full third of graduates felt that their degrees weren’t worththe cost.

Further, drops in enrollment in vocational training have raised questions as to the efficacy ofcurrent 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 mightreasonably be applied to the struggling U.S. system. Limiting the amount of loans, andautomatically enrolling students in income-contingent repayment plans and payroll withholding ofstudent loan payments might go some way toward alleviating the crushing debt burdens of futuregraduates. And the UK’s difficulties in sustaining a free education system prior to 1998 alsosounds a cautionary note for Americans advocating the same.


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