'In March 2021, the outstanding student debt was around £141bn'.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward

In England, thousands of students are preparing to go to universities to acquire higher education to enable them to live fulfilling lives. Whatever the outcome, one thing is certain: most will be burdened with interest-bearing loans taken to finance their studies and due to low wages, only a minority will be able to repay them. The debt acquired negatively affects the possibilities of younger people having access to good food, housing, healthcare, pension, starting families and new businesses.

In March 2021, the outstanding student debt was around £141bn. The loans are administered by the Student Loans Company (SLC). The average debt for graduates exiting universities in 2020 was around £45,000 though medical students carried debts of £192,000. Approximately 1.3 million new loans are handed out each year. Last year, £19.1bn, principal plus interest, was added to the student debt and around £10bn will never be recovered. The unpaid portion is added to the public debt.

The government forecasts that by the late 2030s student debt would hit 11% of the gross domestic product, £560bn (in 2019‑20 prices) or around £1.2 trillion in nominal terms. Most of it will never be repaid.

How did we get into this mess? The Teaching and Higher Education Act 1998 introduced by the New Labour administration was a watershed moment. It introduced university fees and maintenance grants were replaced by a system of loans. The initial tuition fee was set at £1,000 a year for all UK undergraduates.  In subsequent years, with devolved governments in home nations, the picture has become complex. For example, there are no undergraduate tuition fees for Scottish students studying in Scotland. In 2021, English universities will charge annual fee of around £9,250 to home undergraduate students. The bank of Mum-and-Dad may help, but in most cases students will take out loans to cover tuition and living costs.

The general formula for the rate of interest on student loans is retail price index (RPI) plus 3%. For the period 1 October 2021 to 31 August 2022, most will face an interest rate of around 4.5% though depending on the earnings and the date of loan some may face a higher rate. This is much higher than the interest rate currently charged on mortgages by banks. In any case most people’s wages are not increasing at a rate of RPI + 3%.

The amount of repayment depends on subsequent income of the student. For pre-2012 loans, repayments are triggered at gross income of £19,895 a year. For post-2012 undergraduate and postgraduate loans, the picture is a little complex but in general repayments are triggered at annual income of £27,295, which is less than the national average wage. Loans outstanding after 30 years are written-off.

Governments promote the myth that graduates will somehow earn super salaries to repay loans. The reality is different. They have sought to prevent higher wages through austerity, wage freezes, zero hour contracts and anti-trade union laws. In addition, with the relative decline of manufacturing many skilled jobs have vanished. Many graduates have ended up in low-paid jobs, joined the ranks of 14.5 million living in poverty and the unpaid student debt will inevitably increase.

One of the consequences of debt accumulated at undergraduate studies is that many are dissuaded from entering taking Masters and Doctoral level studies or skills enhancement programmes, leading to chronic skills shortages. Other countries have changed their policies. For example, in 2014, Germany abolished tuition fees for undergraduate students studying at public universities. Indeed, most European countries charge no fees or very low fees to their own nationals and EU citizens for undergraduate, and in some cases also for postgraduate education.

England remains wedded to regressive policies. Faced with escalating student debt the government is considering lowering the salary threshold for repayment of debt or extending the term beyond 30 years. Neither is desirable as this will continue to disable many from realising their potential.

Two policies are needed. Firstly, England needs to abolish university/college tuition fees. This will also save a large proportion of the bureaucratic costs involving the SLC (supervised by the Financial Conduct Authority), HMRC, employers and HM Treasury. The Labour Party’s 2019 election manifesto promised to “abolish tuition fees and bring back the maintenance grant”. The cost of this, net of administration and interest savings, was estimated to be £7.2bn year. The Conservative manifesto gave no such commitments but promised to look at the interest rates on loan repayments with a view to reducing the burden of debt on student”. Little, if anything has changed.

Secondly, the accumulated debt of £141bn needs to be written off though no political party gave such a commitment. They are postponing the inevitable. All of the £141bn does not have to be written off in one go. The Treasury only needs to cancel the debt which becomes due for repayment i.e. effectively write if off over the next 30 years. The cancelling of debt will relieve millions and increase household spending to build a sustainable economy.

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