Student loans a fiscal time bomb for the government

24^th March 2014

Patrick Corby

Patrick Corby

24 March 2014

The proportion of UK graduates that are unable to pay back their student loans to the government has been flagged as increasing exponentially towards a 48.6% default rate; potentially writing-off a large portion of the £10 billion on the UK government’s balance sheet per annum.

David Willets, minister for universities and science, notified the parliament in December that the default rate had risen to 40% from 35% in 2013 on the old £3,000 loans.

A collaborated effort between the Department for Business, the Department of Innovation & Skills, the Student Loans Company and HM Revenue & Customs (HMRC), has highlighted that the loans sitting on the UK governments balance sheet could lose value at a rapid rate once the new £9,000 fees come to fruition and need to be repaid.

MP and chair of the committee of public accounts Margaret Hodge said: “There is around £46 billion of outstanding student loans on the government’s books, and this is before the full impact of fee rises to £9,000 a year. We think that the value of student loans never to be repaid, once the new fees are factored in, could be even higher – the Government consistently overestimates what’s due to be repaid by some 8%. Department must improve its forecasting so that action can be taken to reduce the ever-growing write-off figures and their effects on the financial health of the UK.”

The forecast increased default rate has been explained by worsened economic conditions, an over-supply of graduates and relatively lower income that will all contribute to an increase in number of those unable to repay a significant portion of their loans.  Information regarding the repayment of some 350,000 outstanding student loans of whom the Student Loan Office has very little data on has also been highlighted.

Author of The Great University Gamble: Money, Markets and the Future of Higher Education, Andrew McGettin stated: “When MPs voted to raise the maximum tuition fee in 2010, the estimated loss on the related student loans was thought to be 30p for each pound issued. For that to be revised up to 45p so soon is staggering. When you are issuing £10 billion of loans each year, as we are now, that’s an unanticipated, additional loss of £1.5 billion per year.”

Patrick Corby