Nowadays, repaying your student loan into your 50s is a relative rarity, but that will soon change – with terrible consequences both for those who have the loans and the economy as a whole.
New figures this week show that 88,057 graduates who took out the first “income contingent” student loans in 1998 – now in their late 40s or early 50s – still owe some debt.
Most of these are people who aren’t repaying – generally because they earn very low wages, or aren’t working at all, and so are not required to.
But that won’t be the case for much longer.
In fact, a majority of those who have taken out student loans since 2012, when tuition fees were trebled in England, are likely to be paying them off until their 50s.
This is because as well as borrowing significantly more than their predecessors, the terms of their loans were changed so that they are wiped later – after 30 rather than 25 years – and accrue larger amounts of interest, often well above inflation.
Many on high salaries are repaying hundreds a month and still seeing their loans grow due to this interest.
This has dire consequences for these individuals and the economy, many of which will only become apparent over the next few decades.
The first negative consequence is the effect it will have on spending. Over the next 20 years, having a large student loan will become common across decades of generations.
If these people are repaying hundreds or thousands towards their loan, there is clearly going to be a big impact on their disposable income – more concentrated in areas of the country with large amounts of graduates such as big cities.
A report by Oxford Economics has already shown that Plan 2 loans – those given to people from England and Wales who went to university between 2012 and 2022 – are leading to more limited consumer spending, weaker business investment and greater aversion to risk. This issue will only grow as those holding the loans work their way up in the job market.
The second effect is the chilling impact we will see on pension-saving.
Unless you’ve been living under a rock in recent years, you’ll have seen plenty about how the state’s spending on welfare is growing, and placing the public finances under immense pressure.
State pension spending makes up £146.1bn of that expenditure and the long-term solution to that is encouraging more private saving.
The UK has been fantastic at doing this in recent years, with policies such as auto-enrolment boosting the number of people squirrelling cash away for retirement.
But if we want people to boost their saving – so that the state needs to provide less for them – we need them to have enough disposable income throughout their lives so they feel they can part with more cash upfront.
People having student loans into their 40s or 50s is likely to run counter to that plan.
Finally, last week, polling by Opinium found three in 10 people with student loans say they have turned down a promotion, new job or pay rise because of the impact on their repayment plan.
I am sceptical about whether the number is really this high – given it’s self-reported – but I can believe that it is having an impact on behaviour.
If you’re a higher earner making more than £50,270, then with the loan repayments your marginal tax rate is over 50 per cent. As more graduates reach these high earning echelons – many with no prospect of clearing their loans – it seems logical some may cut their hours or limit their work, instead turning their attention to childcare or spending time with family.
The economic impact of this should not be understated. If we’re disincentivising many of our most productive workers from employment, and they’re earning less as a result, this has dire consequences for our national tax take, and growth.
For years, student loans have been seen as an issue for the younger generation. Now, we’re about to see that change.
As the number with large loans grows, it will become more and more politically expedient for change to be offered.
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