Recently I had to look at Student Loans. The UK version. I went to university when students got grants, so I don’t really grok Student Loans the way my younger colleagues do. I had read phrases like ‘burdened by student debt’ and stories about rising fees increasing student debt and assumed that, well, students had to pay these loans off. In the USA they sure do, and in ten years. So I read up at the Student Loan Company’s website, and was astonished by what I learned, and then puzzled that anyone who one might think would know this stuff by virtue of being a journalist, banker or politician would be concerned by how many people had Student Loans to what degree.
My first surprise was that the credit rating agencies do not count Student Loans as part of anyone’s indebtedness. I suspect this is built into the legislation. It follows that no British bank or other lender can take account of a graduate’s “student debt” when making lending decisions.
My next surprise was how student debt is repaid. Over a threshold amount, which varies by the year the course started, a student pays 9% of their salary to the Student Loan Company, and continues to do so until the account is cleared, until the debt is thirty years old, when the outstanding account balance is written off. It follows that the only thing that the ‘debt’ affects is the length of time the graduate pays this 9%-over-threshold amount. At top decile incomes it amounts to around 6% of pre-tax salary, and under 1% at the third decile. It’s a progressive Graduate Tax by another name and method.
A regular loan, such as a mortgage, has a monthly repayment that, if made throughout the term of the loan, will settle the original advance and the accrued interest. If you miss payments, a real lender makes helpful-but-firm noises about how you might carry on repaying. If it’s an unsecured loan, they will hand you off to a debt collection agency after three months or so. If it’s a secured loan, they might throw you out of your house, repossess the car and otherwise send in bailiffs to seize assets and sell them to settle the debt. You have not lived until you’ve had the bailiffs knock on the door.
A Student Loan has no such conditions and consequences. HMRC garnish the 9%-over-the-threshold payment at source, so you can’t miss payments, and if you aren’t earning for some reason, no-one is going to seize and sell your laptop. After thirty years, the SLC writes off the loan. (I mentioned that before, but it bears repetition.) It has none of the characteristics of real debt.
The SLC is not a commercial company: it is owned by the UK Government. It’s not a real company that does anything, it’s the site of an accounting fiction, like a Cayman Islands company but without the bronze plaque. The Government pays the universities, just like it always did. But it does so via some double-entry book-keeping that assigns amounts to individual students. The debt is not intended to be repaid, but serves as the basis of a calculation that determines how long the student will pay the Graduate Tax.
Do the calculations in real terms (I have) and it is clear that for graduates starting in 2018 all but the top earners will reach the 30-year limit with some outstanding debt, which will be written off. Add in some mild salary inflation, and because the threshold is not adjusted for inflation, all but the lower earners will repay their ‘debt’ at some point over the thirty years. If there is not enough wage inflation, the SLC will be writing off at least £2bn a year and everyone will have to go through the farce of pretending it is real money that the taxpayer must provide. (Whereas it isn’t. It’s fiat money invented by the Band of England and hidden by specious double-entry book-keeping.)
The smart student takes all the money they can get, and pays the Graduate Tax. In their early-50’s the balance, whatever it is, will be written off. Only a fool would use real money repay their Student Loan any earlier. The smart investor would no more provide or buy UK student debt than they would a lottery ticket.
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