Student Loans – the UK Debtbomb

In the US the sheer horror of the Student Loan scheme is becoming apparent – it will be the next subprime crises claims Zero Hedge. In the UK we are merely starting the sleepwalk into disaster. It may take 30 years but this is how the disaster will unfold.

Universities used to be for an elite. In a stroke of madness the major parties (and it was John Major’s Tories who were most culpable) decided that 50% of 18 year olds needed to go to Uni. A stack of sub-prime Polytechnics and other colleges were then made Unis. Belatedly the Government realised that this was all jolly expensive. And so after much huffing and puffing we introduced the idea of fees. It was thought that Oxford, Cambridge, etc might charge the maximum (£9,000 a year) and that other Universities would charge less, according to their status. But in fact all Unis decided to go for £9,000. So a degree in media studies at whatever Derby Polytechnic is now called is on a par with pure maths at Oxford? Yeah right.

But we cannot be seen to be deterring poor kids from going to University so all students can borrow that £9,000 a year and if your parents do not earn much you can borrow an additional £4,000 a year.

For ALL the Universities (Oxford down to Derby Poly) this is great. They get a guaranteed income which means that they can afford to employ more staff on protected salaries etc. No-one asks if the courses they are teaching and the students they are teaching are worth the cost because students are paying for it. So this is market forces at work?
That vast student debt is with the students not on the Government balance sheet so this is all fine. Well no. Because the maths do not stack up.

Let us assume that after three years you are on the hook for £27,000 plus the maximum £12,000 supplementary loan. Actually the number is higher as you pay interest at inflation plus 3% while studying so shall we say £40,000 to make the maths easier.
Until you earn £21,000 you repay nothing and interest then charged at the rate of inflation is merely added to your debt. If you are earning £21,000-£40,000 you pay interest at inflation + up to 3% depending in your income. On a salary of £21,000-£40,000 you make monthly repayments of between £30 and £142 which – as part of a bureaucratic night mare requiring the hiring of more Civil Servants – is deducted from your salary at source.

Now we all know that inflation will at some stage not be minimal. The average inflation rate since we left the Gold standard (i.e. the modern fiat money rate) has been 6.11%.
So which ex students will actually pay back their debt? Well the high flyers will do so fairly quickly. However a far larger number will abscond/emigrate/never earn enough to reach the minimum thresh-hold. A good number will become full time mums. And for them the debts will just rack up. Compound £40,000 at 6% a year and after a while it becomes a very large number indeed. At which point there is a real deterrent to someone getting a job earning £21,000 because suddenly you would be paying interest at 10% plus repaying capital at £30 pcm. On a debt which may well be £60,000 or even more that is going to take a huge chunk out of your paycheck. On £21,000 per annum your post tax earnings are currently £1,368 pcm. Take out £500 per month for loan interest and £30 for repayments and you are not in a good place. It might be better to ask your boss to cut your pay to £20,999.

The good thing about student loans is that having a large debt does not stop you getting a mortgage or taking out other finance. Indeed after 30 years it will be written off. Hmm. So there are c 130,000 UK students going to University each year. So after three years of this madness, each and every year another £10.5-15 billion of debts will be owed by students to the Government.

The Government may parcel these debts off to investors who (knowing full well how many folks will default/never repay) will only pay a percentage in the pound. What would you pay? 50p maybe? And so each year the Government would – if it is honest – have to take a £5-7.5 billion hit on this scheme which was meant to relieve the taxpayer of the obligation to fund the crazy expansion of UK universities.

If the Government does not parcel off these debts it could pretend that they are an asset on the National Balance sheet. It will only be in 30 years time when the chickens start coming home to roost. Just one debt of £40,000 which has not been repaid but has compounded up at average inflation (6.11% plus 3%) will by then be worth £547,011.80. Hmmm and it will be a bad debt.

Someone is going to take a hit on this. Whether student loans are parcelled off as sub prime ( in which case the taxpayer takes a year 1 hit) or kept on the books (in which case this is a year 30 hit), it will be the taxpayer that suffers in the end. And to what purpose?