Mark Farrar, Chief Executive, AAT

Theresa May’s calls for a review on the cost of higher education comes not a moment too soon. University provides many people with a great start in life, but there’s no doubt that the current levels of debt some graduates are finding themselves in are quite onerous, and in many cases, they will never be paid back in full before they are written off.

Students really need to be asking themselves whether they really wish to get into such debt so early in their lives, given that they also have to plan for other large financial commitments such as getting onto the property ladder or saving for a pension. The Prime Minister’s announcement about ending attitudes which favour university over high-quality technical qualification solutions may provide many thousands with some food for thought.

Graduate debt spiralling out of control

Since tuition fees were first brought in during 1998, graduate debt has risen rapidly to its current level of around £50,000 (accelerating to £57,000 for poorer undergraduates who receive higher maintenance loans), while the overall current outstanding value of all tuition fee and maintenance debt has now hit £100 billion.

Under the current system, student loans are repaid through a deduction of 9% on any earnings over £21,000. Taking an example of a graduate on a very generous starting wage of £41,000, the annual interest applied to their debt is currently 6.1%, which means many will not complete their payments within 30 years (after which time the remaining loan is written off). Assuming their salary kept pace with current inflation and rose by 3% each year – after 30 years they would have paid a whopping £118,853, but would still have an outstanding debt of over £17,000.

The income threshold above which students will need to start making repayments is set to rise to £25,000. However, assuming the same example of a graduate starting on £41,000 who therefore now needs to make repayments initially on £16,000 worth of earnings (assuming the interest rate remains at 6.1%), that same graduate would have an outstanding debt of nearly £48,000 at the end of their 30 year repayment schedule.

For those undergraduates from disadvantaged backgrounds who are coming out of university with £57,000 debts, following a same earnings pattern would in fact result in their student loan debt rising to £58,496 at the current 6.1% interest rate level after 30 years, while their remaining debt after the income repayment threshold rises to £25,000 would be nearly £90,000 after 30 years.

Size of initial loan

Interest added (annual)

Start of income level for repayments

Total loan repayment over 30 years

Size of remaining loan after 30 years

£50,000

6.1%

£21,000

£118,853

£17,138

£50,000

6.1%

£25,000

£108,053

£47,872

£57,000

6.1%

£21,000

£118,853

£58,496

£57,000

6.1%

£25,000

£108,053

£89,230

 

University not the only solution

Unless radical reforms are indeed brought in, with so much student debt likely to ultimately be written off over the coming years, will future Governments be able to fund the gap?

With many companies nowadays seeking a diverse workforce, being a university graduate is not the only entry route into the career of your choice. In addition, choosing a non-university pathway can help young people avoid these significant graduate debts, and instead allow them to gain the skills while earning a wage in the workplace.

Mark Farrar, Chief Executive, AAT

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