UK Student Loan Repayments

Question

This is something I’ve always wondered about and have never really found a satisfactory answer. Maybe I've misunderstood how student loans work.

I've completed a Uni course (plan 2) after borrowing £27000 for tuition fees, plus £9000 in maintenance loans, so £36000 total.

Essentially, isn’t it possible for me to not ever repay my student loan in full, even if I'm above the repayment threshold? Let’s say I earn £30k per year. Currently (as of 6 April 2018) that means I’ll repay £444 per year. If I do this for 30 years, at the end I’ll have repaid £13,320, which isn’t even half of the total loan, and after that point the loan gets wiped anyway. I guess the idea is that at some point I’ll earn more than £30k per year and will ultimately end up paying off the full amount, but it’s still possible for this not to happen, right? If so, isn’t this bad for the government, because they’re lending out money they might not get back?

Answer 1

The UK Student Loan system is best thought of not as a loan, but as a tax on future earnings. You are correct, the majority of people will never clear their debt, a substantial portion won't even repay the base sum they borrowed. This is all costed into the whole student loan system of funding, and the focus is to (broadly) break even, as opposed to traditional loans which seek to make profit on loans provided. The gain for the government is an educated population with greater earning potential. The risk is that it might cost a little if payments are lower than loans given out, however it is still a substantial saving on, say, the Scottish model where there are no tuition fees and the government foots the whole bill regardless.

Martin Lewis waxes lyrical about the student loan system in the UK and how widely misunderstood it is (check out his website here: https://www.moneysavingexpert.com/ and search for student loans).

There are some very key differences between a traditional loan and a (UK but not Scotland) student loan in that:

• Student loans don't affect credit scores
• There are no penalties for non-payment
• Debt is wiped after 30 years regardless
• There are much fewer circumstances where making extra payments is beneficial
• It is automatically deducted from your salary by your employer (assuming you pay tax by PAYE)
• The debt does not form part of your estate upon death and is written off in such circumstances (thanks to @IMSoP)

Answer 2

If so, isn’t this bad for the government, because they’re lending out money they might not get back?

Basically, using its citizens money to improve the overall standard of living is the main (one could even say the only) task a government really has, so spending money is not a bad thing, it’s by design. If you will, student loans (that are discounted) are a form of government subsidy.

Then, the question could be, why even bother to loan the money? Why not simply make college free?

That is simply a budged-saving technique or leverage to maximize the amount of people you could support with a given budget. By having those that can afford to pay some of the money back, you don’t have to finance it all in tax money.

Answer 3

Essentially, isn’t it possible for me to not ever repay my student loan in full, even if I'm above the repayment threshold?

[...]

I guess the idea is that at some point I’ll earn more than £30k per year and will ultimately end up paying off the full amount, but it’s still possible for this not to happen, right?

It is not only possible, but for the average student it is likely the student loan will not be paid off in full. Some ex-students will never make any payments at all. A BBC article from 2014 states that "Around 45% of university graduates will not earn enough to repay their student loans, the government now believes."

If so, isn’t this bad for the government, because they’re lending out money they might not get back?

The government has traditionally subsidised higher education (the benefits to society of an educated workforce being best left to another question). However policy over the last few decades has been to transfer more of the costs onto students in order to reduce the costs borne by the government and to increase investment. This has been done by reducing or eliminating grants, by increasing tuition fees, and increasing the interest rate on tuition fees funded through the student loan system.

As the balances owed by graduates increases, it is to be expected that increasing numbers will be unable to repay the loan in full. However, initially it was "estimated that 28% of loans would never be paid back in full" (BBC, 2014) and that the costs of the new system would exceed those of the old one "if 48.6% of all student loans were not repaid".

Since the BBC article was published, the government initially froze the student loan repayment threshold at £21,000 instead of increasing it annually as previously promised, in order to reduce the cost of the system. However, this year the government has raised the repayment threshold to £25,000. It will remain the case that for large numbers of graduates the loan will never be repaid in full.

Source: http://www.bbc.co.uk/news/education-26688018

Answer 4

Yes, it's not only possible but expected that most students will never repay all of their loans. The government still benefits by getting an educated workforce that pays more tax because it's better paid.

Answer 5

Yes, it's in fact likely you'll never pay it off fully and this has (notionally) been factored into the costing of the system. The worst situation for you to be in is actually around the £30k mark - too slow to pay off the capital, but still enough that you'll have fairly high repayments.

I find it highly worrying that we are saddling 17-18 year olds who have little to no appreciation of the process with vast amounts of debt. Now, it's not something you must carry on paying regardless of situation, but it's still a high financial burden to carry for a long period of time.

Answer 6

All loans – whether issued by a governmental organisation or not – involve lending out money the lender might not get back.

The repayment structure of UK student loans increases the likelihood of a loan not being repaid in full, but the risk of a borrower's income history leading to the writing-off of the loan after 30 years isn't fundamentally different to the risk that they cannot afford to pay off a loan of any kind and end up defaulting.

To some extent the interest paid on loans that do get repaid offsets the losses on the loans that don't. A private lender aims to ensure that the profit left over after these losses is sufficient to make the risk worth it. For the UK government, an overall loss, paid for by taxpayers, may still be deemed acceptable because the aim of issuing the loan is some public good rather than to benefit directly from having issued the loan.

Answer 7

Ah politics.

Politicians want to spend tomorrows money today but they know that national debt is something that gets looked at by both a certain category of voters and also by financial institutions (both domestic and foreign).

So methods that allow them to spend tomorrows money today without it actually being considered national debt are attractive to them. Witness the huge explosion of PFI.

Until relatively recently student loans were something that students were expected to repay except in highly exceptional cases, but the government cranked up both the total amount lent and the interest rates while not increasing the required repayment rate, raising the repayment threshold and for most students* reducing the time until the loan is written off. The result is students now are taking on student loans that some of them will never repay.

In 25 years or so a large number of student loans will be written off which will look bad on the books for the government of the day but present day politicians don't care about that.

* The old writeoff times were age based while the new ones are duration based but for a student graduating at the normal age the old times were much longer.

Answer 8

Bear in mind that, because of the threshold, it doesn't scale like I think you're imagining it does. You're currently earning £30k which is £5k over the £25k threshold, so you're being taxed on 9% of £5k. Your repayments work out very low - £444/year.

To keep things simple, say your salary doubles to £60k gradually over the next 30 years. You will then be paying 9% of £35k. This would work out to £3144/year. Your salary has only doubled but your student loan repayments have multiplied by seven^.

But is £60k a reasonable number? In the US, the average worker's salary increases by roughly 38% over their career, with the largest increase in your twenties.

To keep the maths simple again, let's say your salary increases by one third in 10 years time, but then remains constant for the final 20 years. You would pay £4400 in the first 10 years plus £27,000 over the last 20 years. You'd only have around £5k of debt remaining which would be wiped. This is very conservative, though, as it doesn't account for the ramp up over those initial 10 years.

To put it simply, the repayment system is designed so that most people will repay most of the loan by the end of the 30 year term. It will of course depend on your personal career goals but even if you stay in the same position for the next three decades without a raise, recouping one third of their capital isn't necessarily a particularly outcome - as other's have already noted, governments are able to tolerate losses on student loans because having a well-educated population can generate income in other ways.

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^ If you're curious, your take-home pay would work out about 1.7x your current salary, due to the higher tax bracket and increased loan repayments.