The student 'loans' that will never be repaid

The absurdity of the student loans system means that even relatively well-paid graduates won't be able to pay off the full amount over their working lives - leaving the taxpayer to pick up the tab.

I've written here several times before about how the new student loan system is nothing more than a new and very high progressive tax. Those on low pay will pay none of their loans back, those on middling pay will end up having much of it written off, and via the high interest rates charged and compounded on the debt from day one, high earners will end up subsidising everyone else.

More data on this comes from the Mail on Sunday this week. Their research suggests that around 85% of students will never pay back their loans (they are automatically written off after 30 years). An example:a student on a three-year course with tuition fees of £9,000 a year and getting a maintenance loan of £3,575 a year on top of that would end up with a total debt at the end of their degree of £43,515.

That's higher than you might think for the simple reason that it is calculated as carrying an interest rate of RPI (retail price index)plus 3%. That's despite the fact that the government is trying to move most other things so that they are calculated relative to CPI (consumer price index). That rate is charged and compounded as soon as the money is taken.

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By their second year at university, most students will already be racking up interest on interest. Many of them will never stop doing so. Let's say the student starts work on a salary of £21,000. The starting rate here is currently £34 a month, but that is nowhere near enough to pay even the interest on a debt of over £43,000.

So interest builds on interest (unpaid credit card bill style) and even if the ex-student's salary rises at 2% over inflation during her career and she never takes a career break, at the end of 30 years, her debt will be £101,942. It will be written off and the taxpayer will take the hit.

Make her starting salary more generous say £26,000 and she will find that the debt will also escalate: £76,000 will be written off in the end. In fact, for the debt to not actually escalate (ie, for her to be paying all the interest every month from day one), she would need to start on a salary of over £50,000. Even someone starting on a huge £35,000 (pretty rare for the modern grad) would leave a small debt to be written off.

These numbers obviously don't tell the whole story. Large numbers of graduates will see their salaries rise much faster than inflation plus 2% a year promotions and the like will see them have some years when their salary rises 20-30%.

At the same time, many graduates will make matters (from the taxpayer's point of view anyway) much worse by either giving up work to have families, working part-time, or never making enough to have to start making payments at all.

But either way, the more you look at the way the system works, the less likely it seems that the government is right when it claims that 60% of students will repay their loans over their working lives. They probably won't.

Don't forget to add in retired students and the strong likelihood that they will be getting their degree entirely for free

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.