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UK: David Willetts wants universities to take over student loan debt

The typical student will leave university with more than £44,000 in debt under the system of higher fees and interest-bearing loans introduced in 2012 – £20,000 more than under the system it replaced.
EdChron Desk on July 29, 2014 - 12:40 pm in EdNews, MAIN, U.K., World

 

UK – The former Minister of State for Universities and Science, David Willetts wants universities to underwrite students’ debt. This is so that students who are unable to repay their loan will not be a burden to taxpayer’s money.

Tuition fee up to £9,000 a year in “exceptional cases”

Willetts left his post earlier this month in a cabinet reshuffle, after driving through major reforms during his tenure, most notably the increase in tuition fee cap to £9,000 a year. Back then in 2010, The Guardian reported Willetts told MPs “We believe a limit is desirable and are therefore proposing a basic threshold of £6,000 per annum. In exceptional circumstances there would be an absolute limit of £9,000.”

“Graduates will pay a contribution towards the cost of their degrees once their earnings have risen above £21,000 a year, repaying 9% of their income above this level,” Willetts added in the report.

OFFA reports 76% institutions charging £9,000 tuition fees

The Office of Fair Access (OFFA) released data days earlier, in the upcoming academic year of 2015 – 16, “130 institutions (76 per cent of institutions with access agreements) will charge a maximum of £9,000 for some or all of their courses. This compares to 117 (72 per cent) in 2014-15”.

Student debt will increase by £20,000

In April this year, research for the Sutton Trust by the Institute for Fiscal Studies (IFS) sets out in detail for the first time the full implications for graduates of the new student loan system which accompanied the higher tuition fees introduced in 2012.

It found that the typical student will leave university with more than £44,000 in debt under the system of higher fees and interest-bearing loans introduced in 2012 – £20,000 more than under the system it replaced. After allowing for inflation and anticipated earnings growth, the report shows that they will pay back an average of £35,446 in today’s prices, compared with £20,936 under the old system, or an additional £14,510.  You can download the report here.

Universities as banks

Many fear the students will bear the brunt of this change, if the proposal is approval and implemented. For the universities to bear student debt, they would either need to have the funds or support from financial institutions such as commercial banks.

While corporate interest rates could be lower, it is not known if universities will lobby for an increase of the current tuition fee limit of £9,000 a year, since they now assume some risk for every student’s loan. It is also not known how the proposal, if approved, will be implemented: will universities have access to all student information? Will parents be forced to be guarantors? Will the students repayment percentage be more than 9%? Do universities even want this?

Excellent in theory, but what about in practice?

The theory of universities underwriting for students sounds excellent – it is assumed students from the institutions will go on to command higher wages, and universities will earn from the loan’s interest rates when the student repays his loan in full.

The problem is this: many students cannot afford to repay their student loans in full. Only 5% will do so in the new system of increased tuition fee. In fact, 73% of all graduates will not have repaid their debt in full by the end of the repayment period, meaning that they will still be making repayments into their fifties.

There is also the issue of conflicting interest – if the university takes over students loan, it will try its best to recoup its investment, and earn from the interest rates. For students to begin repaying their loans, their salary needs to be above £21,000 a year. Students then repay 9% of the amount above £21,000 they’ve earned to the student loan. Will this mean universities will focus on courses with higher starting salaries and better pay progression? Will such courses increase its student intake so that universities can maximize their returns? What will happen to courses that doesn’t pay well in the corporate world?

Current situation

Currently students are lent money by the Treasury for their fees and living costs. Once they have graduated and their salary exceeds £21,000 a year they pay back a share of their income in repayments, The Telegraph explained.

After 30 years, any outstanding debt is written off, leaving the costs of the debt – currently assumed to be between 30p and 40p in every £1 that the treasury lends – to be met by the government.

What do you think?

 

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