The Ugly Underbelly of Student Loans – An Analysis

By Dominic Prince

Household Income Expected Parental Contribution %ge of post-tax income
£30,000 £600 3%
£35,000 £1,199 4%
£40,000 £1,799 6%
£45,000 £2,398 7%
£50,000 £2,998 8%
£55,000 £3,597 9%
£60,000 £4,197 10%
(Fig.1) Expected parental contribution is the difference between the max loan and the loan offered to the student with each household income level. Tax rates and loan amounts (London) taken from 2016/17.

For years, the issue of student loans have been centrefold in the student’s manifesto. Typically, though, the core grievance has been tied to the increase in tuition fees and the scrapping of maintenance grants. However, a new issue is now being brought into the spotlight. One that has been prevalent but underpublicised for a while now.

Even though government grants have recently been scrapped to be replaced with loans, what many continue to fail to realise is that the repayment system is perhaps one of the only just elements of the system. You will not even start repaying your loan until you earn £21,000, at which point you repay a proportion of your income that amounts to around £60 for every £1,000 earned over £21,000. By nature, this system is concerned with justice. Those who receive more from their university experience will contribute more. So those who fear receiving less needn’t worry. It is wrong to consider the scrapping of maintenance grants a barrier to entry into higher education. If their fears are realised and they take on this debt without the reward of a high-earning job, they will contribute less, and will in all likelihood make a profit from their loan when it gets wiped at age 50. So despite the publicity, those ex-grant students with larger loans are (although admittedly less lucky than before) actually more lucky than many, as we will see.

The issue now being brought into the spotlight is that of the squeezed middle of the student loan system- a system which expects higher earning parents to give up to 10% of their income to their children.

Our society is one that prides itself on rewarding those who work hard. It prides itself on encouraging future generations into higher education. However, not only was the now defunct grant system totally biased towards low-income households (who were given free money- it seems unfortunately necessary to remind you that money from parents is certainly not free, contrary to the incessant beliefs of many), but the new loan system is still biased towards low (and now also very high) income household. This is what has created the ugly underbelly of the student loan system- it’s proviso for punishing some of our societies hardest workers, and their children, when they choose to go into higher education.

A generation of parents raised on the ‘silver shovel’ approach now find themselves facing a conundrum. Two parents on £30,000 each wonder how can they give their children 10% of their post-tax income with mortgage payments to think about, council tax to tackle, and perhaps other children to raise. At this point, some would remind me that those on lower incomes actually have nominally less post-tax income and are still expected to give sizable sums. They would probably say that there is a universal base price for a reasonable standard of living, and that relative to this those with lower incomes are more likely to have to give up some aspect of their quality of life than those on higher wages. This is a reasonably fair objection, but one that I have three responses to. Firstly, the sums of money that they are expected to give their children are far smaller, making it reasonably feasible for them to take it from savings or even for the child to have a chance to earn some of it with a summer job. Secondly, that parents on higher incomes often feel (rightly) entitled to maintain their standard of living. After all, society encouraged them to get to where they are today, and they are told to be proud of this. Thirdly, that students on low income often qualify for support from their university- which, rather ironically, usually comes in the form of a grant.

So, what becomes eminently clear is this- those on low and lower incomes are given more money from the government that is either free (in that they won’t pay it back) or comes at a fair price (since to pay it back they will have reaped the rewards of their university system). Those with the most money are less inclined to be affected by their child’s pecuniary matters, since the cost of university education is less relative to their wealth. But those in the middle are the ones expected to contribute the most relative to their income, and who will receive the smallest help relative to their income. There are intrinsic inequalities in the system that create perverse incentives for the middle earners. The system that taught them that hard work is rewarded is now telling them to give a heap of their cash to their child, while others have to give less. How is this fair for parents?

Speaking in other terms of equality, we also need to recognise that it simply can’t be fair that something as arbitrary as which family you are born into should affect how much you are able to borrow. Think of any other system in which someone who is legally recognised as an adult’s ability to borrow money is based on their parent’s income. It’s a ridiculous proposition, often accentuated by those rare cases of students estranged from their parents. Crucially, the student loan system implicitly assumes some sort of benevolent relationship between parent and child. A financial relationship- which those on lower incomes are at the very least less reliant on, and those on the highest incomes worry less about by nature. It is a cardinal error of the system to expect middle-earning households to want to help their children.

What we should realise from all this, then, is that the winners of the current system are the very wealthy and relatively poor. Wealthy households need worry less about financial matters, and relatively poor students are at least awarded autonomy in their financial affairs. The squeezed middle, who are constantly jaded with guilt in asking their parents for vast amounts of money that they may not have and are under no obligation to give, are the real losers. If only because they have to bear some of the cost of university as a household, and not have the cost of university only conditional on their success at university. It is time that we make this known, and educate students not just into, but also about, debt.