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Debt timebomb 85 per cent of students never pay off loans

About 85 per cent of students in England will never repay their student loans, according to research conducted for The Mail on Sunday. It suggests that hundreds of thousands will be burdened with long-term debt, making it even harder for them to afford to buy a home.

The findings, which fly in the face of earlier Government claims that suggested 60 per cent of students would be able to clear their loans during their working lives, could have a severe impact on the UK’s finances because debts are automatically written off after 30 years.

The student loan time-bomb is a result of changes introduced last autumn to the way fees are charged – and in particular the interest on outstanding debt.

Student loan time-bomb: The research leaves the government's cash forecast in disarray

Students who started in college  or university before last autumn currently pay 1.5 per cent a year. But for those who started last autumn, their bigger loans – up to £9,000 a year for tuition fees as well as a maximum £5,500 maintenance loan – have a higher rate.

This is calculated at the Retail Prices Index (RPI) plus three percentage points. Based on the March RPI figure, this gives 6.3 per cent. And inflation is expected to rise.

The research, by Dr Mike Clugston, a teacher at Tonbridge School, Kent, confirms that because of the devastating impact of the compounding of interest, only 15 per cent of students are likely to repay debts from income alone. The repayments they are required to make once they start working will do little to stop their debts escalating.

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Clugston’s work has been backed by Sir John Stanley, Conservative MP for Tonbridge and Malling, who helped him provide evidence to the Business, Innovation and Skills Select Committee in 2011 that looked at the proposed changes to student loans brought in last year.

Clugston is a thorn in the side of the Government. He has challenged it on wrong tax codes on two occasions.

Research among his pupils confirmed widespread ignorance about the changes to the interest charges applied  to student loans taken out  from last September.

‘I asked 160 pupils what the new tuition fees cap was and they all chorused £9,000 a year,’ he says.

‘But when I asked about the rate that would be applied to these loans, not one boy could tell me what it was.’

Clugston says a student on a three-year course with tuition fees of £9,000 a year and getting a maintenance loan of £3,575 would leave £43,515 in debt. This is based  on a rate of 6.3 per cent (RPI plus three points). After university, they start making repayments once their salary is over £21,000. At present, repayments  for someone on £21,000 are  £34 a month.

Interest continues to be applied to the debt with the rate depending on  the size of earnings – the more they are paid, the higher the rate, subject to a maximum  of RPI plus three points.

Warning: Rector John McCabe

Take, for example, someone starting on the average national wage of £26,600. Assuming earnings growth throughout their career of  RPI plus two points and the £21,000 threshold increases in line with inflation, Clugston calculates they will never repay their loan. The £43,515 debt accumulated at university will escalate for 27 years – peaking at £78,510 – before falling slightly to £76,800 at the end of Year 30. Under current rules, the debt is then written off.

For the £43,515 debt not to escalate, the graduate’s starting salary would have to be £51,460. For graduates on a lower starting salary, Clugston’s analysis is more worrying. At £21,000 – the threshold for loan repayments to be made – and using the same assumptions as in the previous example, Clugston calculates that the graduate’s debt will keep on escalating because the required repayments are insufficient to arrest the impact of compound interest. At the end of 30 years, the outstanding debt is £101,942.

Only those graduates among the top ten per cent of earners will come close to clearing their debt. Someone starting on £35,000 will be left with a debt of £2,245 after 30 years.

Clugston says: ‘David Willetts, the Universities Minister, says 60 per cent of students will repay their debts over their working lives. But  I think this is highly unlikely. Based on the reasonable assumptions I have made, the Government will be forced to write off billions of pounds of student debt per year.’

John McCabe, rector of St Mary’s Church, Byfleet, Surrey, has closely followed Clugston’s work and says the findings are devastating.

‘It’s already extremely difficult for young people to get on the housing ladder and these accelerating loans are not going to help,’ he says.

‘The regulator warned about the time-bomb of interest-only mortgages. Well these loans are another time-bomb. This  is creating a culture of living with unrepayable debt – and wasn’t it that culture that has caused so much damage to the strength of the economy?’

Will 19-year-old Louise Brewer ever be free of her £39,000 millstone? Job hunt: Louise Woodruff, front, and Louise Brewer

First-year students Louise Brewer and Louise Woodruff face a lifetime of rocketing debt – and there is little they can do about it.

Unless they are incredibly lucky, they face servicing six-figure student loan debts well into their early 50s, making it nigh impossible for them to become homeowners.

Like many students, the friends, studying at Southampton Solent University, know they will be burdened with debt for many years. But for now the pair, from Byfleet, Surrey, are more concerned about finding summer work so they do not have to go to the ‘bank of mum and dad’.

They are also more worried about getting a job once they graduate than the millstone of student loan debt that they will carry for years to come.

Louise Woodruff, 18, who is studying for a degree in advertising and wants a career in media buying, says: ‘The debt I am taking on does scare me and it’s an issue I talk about with colleagues.

‘We all worry about finding work post university and how quickly we can clear our debts, but we know our priority is to focus on the course.’

Louise Brewer is studying interior design decoration and already has ambitions to set up her own business. She says she is ‘quite good’ with money and has yet to ask her parents for support.

Over the summer, she  will work in a cafe at  the Royal Horticultural Society’s Wisley Garden near her parents’ home.

‘I didn’t realise the interest rate had gone  up for loans for first-year students like me,’ she says. ‘I imagine my debt will be with me for ages.’

According to the loan calculator created by  Dr Clugston (see main report), Louise Woodruff will leave university with  a debt of £37,373. This is based on annual tuition fees of £7,800 and a maintenance loan of  £3,000 and interest of  6.3 per cent (RPI plus  three percentage points).

Assuming she is able to secure a job on the average salary of £26,600, with annual earnings growth of 5.3 per cent (RPI plus two points), her debt will jump to £56,343 by year 22 before falling to £45,853  at year 30 when the Government will wipe it out.

For Louise’s debt not to escalate, she would need  a starting salary of £47,161.

Louise Brewer pays the same tuition fees but has an annual maintenance loan of £3,500. On graduation, she will owe £39,103. This will rise to £61,904 by year 24, falling to £54,571 by year 30  when it will be written off.

If her debt is not to mushroom when she starts working, she would need  a starting salary of £48,372.





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