The Daily Telegraph - Saturday - Money
PERSONAL ACCOUNT
Is it worth borrowing billions of pounds to go to university?
Forget about the students. It’s that time of year when parents are the ones with money worries: how are they going to afford three years’ tuition and living costs?
The average 18-year-old is not going to be preoccupied with how, over the next three or four years, he or she will build up an average of more than £50,000 of debt. Their biggest worry is likely to be whether or not they can borrow enough. And that’s understandable. The costs of full-time study, as you see on Page 1, are staggeringly high.
Parents, on the other hand, do worry about that debt. They will worry about how it might hang over their offspring’s careers and limit their future choices. They know from experience how difficult debt is to repay.
A radical shift has taken place in our attitudes to debt. And the vexed issue of student loans – and the huge interest which will add £5,800 to students’ debts even before they graduate – has brought this into focus.
A 59-year-old father with two twentysomething children currently at university put it to me as follows: “In my parents’ generation, what you spent was based almost entirely on what you earned and saved.
“In my generation, what you spend is based on what you earn, what you save, and a multiple of your earnings that the bank is prepared to lend you.”
“In my children’s generation there is spending on the basis of zero earnings and zero savings, and in many cases a slim likelihood of future earnings, either.”
Some might say that is too gloomy. We do not really know what will happen to future earnings, but we do know that on some measures – such as income-to-rent or income-to-house price ratios – life looks hard.
The Martin Lewis view …
Money-saving expert Martin Lewis takes the view that fretting about student debt is pointless. He says headlines about huge debts should be ignored.
It’s not the debt that counts, he says, but what you’re ultimately obliged to repay.
The way the loans work means that in a practical sense he’s dead right. Borrowers don’t repay until they earn above a threshold and thereafter they pay only a fraction of their wages. After 30 years all remaining debt and accumulated interest are erased.
Mr Lewis says: “What you repay solely depends on what you earn after university. In effect this is, financially at least, a ‘no win, no fee’ education. Those who earn a lot after graduating or leaving university will repay a lot. Those who don’t gain too much financially from going to university will repay little or nothing.”
… and why it’s wrong
Martin Lewis’s view doesn’t sit comfortably with me. The bigger picture is that borrowing without any means of repaying is foolhardy. It’s foolhardy in the same way that lending to people who have little prospect of being able to repay is. It’s dangerous.
Debts do not disappear simply because borrowers cannot afford to repay them. Someone else foots the bill. Unpaid student loans will become someone’s problem, or an entire generation’s.
Mr Lewis’s view is of someone in their 50s jigging for joy because their uncleared student debt has been wiped out. What I don’t see is who is paying. When banks make their apparently regular mistake of lending en masse to borrowers who can’t repay, the taxpayer generally carries the burden. We are all acutely aware of that now.
This takes the issue into the deep and troubled waters of how best to spread the tax burden across old and young. If taxpayers are going to end up paying for this anyway, isn’t there a fairer, more explicit way of doing it?
One “macro” answer is policies that drive economic growth and with it employment opportunities, higher wages, increased housing supply and more. That may not come soon enough for today’s 18-year-old borrowers.
Another answer, as the Adam Smith Institute recently suggested in a Millennial Manifesto, would be to turn the loans into a tax surcharge, and explicitly lift away the concept of debt to replace it with a tax on future earnings.