Students could be paying loans into their 50s

A large majority of students will still be paying off their student loans well into their forties and early fifties, and nearly three-quarters will fail to clear their loans before they are written off after 30 years, according to new research for the Sutton Trust by the Institute for Fiscal Studies.

The report, ‘Payback Time?’, finds that the typical student will leave university with more than £44,000 in debt under the system of higher fees and interest-bearing loans introduced in 2012 – £20,000 more than under the system it replaced.

After allowing for inflation and anticipated earnings growth, the report shows that they will pay back an average of £35,446 in today’s prices, compared with £20,936 under the old system, or an additional £14,510.

Illustrative calculations for the report show that if inflation runs at the level assumed by the Office for Budget Responsibility, in cash terms the average graduate would repay £66,897, more than twice the £32,917 they would have repaid under the pre-2012 system.

Graduates repay loans at a rate of 9% on all income above £21,000 in 2016 (compared with £15,795 in 2012 under the old system). Those starting university since 2012 pay a real (above-inflation) rate of interest of up to 3%, whereas there was no real rate of interest previously. Interest charges begin while the student is still at university.

The IFS report shows the consequences of these changes. Under the pre-2012 system, half of all graduates would have repaid their debt in full by the age of 40. Only 5% will do so in the new system. In fact, under the new system, 73% of all graduates will not have repaid their debt in full by the end of the repayment period, meaning that they will still be making repayments into their fifties.

In part this is because graduates in their twenties will be paying slightly less than under the old system. Payment will be delayed because the earnings threshold has been raised. This means that those with average yearly incomes of less than £28,000 are likely to pay back less in total under the new system as a result of the higher earnings threshold.

The IFS researchers estimate that a middle-earning graduate – someone whose annual earnings are higher than half of all graduates (including those out of work) at each age – will still owe around £39,000 at today’s prices by the age of 40, and will have to pay back around £1,500 a year throughout their forties. (See note 3.) Even by age 50 they will still owe around £32,000, though any remaining debts will be written off one year later.

A typical teacher (who is in work each year and earns the average earnings among teachers at each age) will still owe around £37,000 at the age of 40 and will be expected to repay £1,700-£2,500 a year throughout their forties and early fifties. Under the previous system, a typical teacher would have paid off their debt by age 40.

The news comes after the Department for Business, Innovation and Skills said recently that it now expects that 45% of loans given to students paying the higher fees will not be repaid, close to the 48% level where the gains to the Exchequer of the higher fees are wiped out.

Conor Ryan, Director of Research at the Sutton Trust, said today: “There has been a lot said about the lower repayments that graduates make in their twenties under the new loan system, but very little about the fact that many graduates will face significant repayments through their forties, whereas many would previously have repaid their loans by then.

“The new system will benefit graduates who earn very little in their lifetime. But for many professionals, such as teachers, this will mean having to find up to £2,500 extra a year to service loans at a time when their children are still at school and family and mortgage costs are at their most pressing. With recent revelations about the proportion of loans unlikely to be repaid, it seems middle income earners pay back a lot more but the Exchequer gains little in return. We believe that the Government needs to look again at fees, loans and teaching grants to get a fairer balance.”

Claire Crawford of the University of Warwick and the Institute for Fiscal Studies said: “The new HE finance system will leave graduates with much more debt than before. But the effects of the changes will be quite different for different people and at different parts of their lives. Graduates who do less well in the labour market will actually end up paying back less than before, while middle and high earners will pay back much more.

“In that sense, the system is more progressive and looks in many ways rather like a graduate tax. The size of the repayment threshold also means that graduates will generally pay back less during their twenties but much more later in their careers, especially when they are in their forties. Remarkably, almost three-quarters will have some debt written off 30 years after graduating.”