Thursday, November 28, 2013

Student loans: an omnishambles - why we should all worry

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.
No idea!
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 unexpected consequences
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 solutions.
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 the future.

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