We all know about student loans in the US topping $1 trillion, above credit card debt. But the UK revealed its own problems this week and it's not good news. The student loan book is a rapidly inflating bubble with
the total value of outstanding loans set to quadruple from the current £46
billion to £200 billion (at today’s prices) in less than 30 years. To be
absolutely clear, over a third (35%) of new loans are not expected to be repaid
and around 50% not to be repaid in full. Although nobody knows for sure and the
problem is likely to get worse, not better. In the short term, over the term of
the next parliament the Government expects there to be a £3 billion shortfall
between what was expected in repayments and what will actually be collected.
Year on year BIS over-forecasts how much student loans it
will collect. This has led to huge, forecast, budget problems. Worse, still they
have no idea what has happened to hundreds of thousands of students, write only
cursory letters to find out and regard chasing the debts as a waste of time. The
amount that has been written off has risen by 25% over the last three years.
Laws of expected and
But before blaming BIS we have to reflect on the impossible
task they face. There’s every incentive for students to ‘disappear’ and make
every effort to go under the radar. This, in itself, may destroy one of the
rationales for getting a degree – the ability to contribute openly and
constructively to society. We may also be inflating another debt bubble, as
student loans will not be included in mortgage risk calculations (in fact they
will) exacerbating the debt problem.
So this policy suffers from the law of both expected and
unexpected consequences. All the signs are that this is getting worse, not
better, and that we are burying our heads in the sand when it comes to
Sharp rise in
unsecured consumer debt
PwC attribute a sharp 4% rise in unsecured lending of £8.6
billion to £216 billion in 2013, almost entirely to student loans. The UK is among
one of the most indebted nations on earth, with over £8000 of debt per
household. The danger comes with interest rate rises and the dampening effect
debt has on getting mortgages, starting a business and so on.
Big impact elsewhere
I thank Seb Schmoller for pointing out the excellent lecture
by Bahram Bekhradnia, where an additional worrying consequence is outlined, that of increased CPI and therefore increased cost to the public purse on pensions and other benefits of around £1 billion due to the increase in student fees. This is a curious double pump effect on the debt bubble, where increasing student debt, increases public spending.
This may be unpopular, but I believe in student fees, as
alternatives effectively regressive taxes. It also establishes a direct link
between what you get and what you pay for. However, this system would be a lot
cheaper then the current system, if fees were paid up front, with generous
means testing and bursaries. We’re heading for trouble by offsetting debt into