Many graduates will never pay off their student debt as loans rise

New research from the Institute for Fiscal Studies (IFS) has found that three quarters of graduates will never repay their student loans as the average debt is set to rise to £50,800 after interest rates on student loans rises to 6.1%.

It is thought that those from poorer backgrounds are likely to graduate with debts of over £57,000 as they are having to take out extra maintenance loans over their time at university to support their study and living costs.

The trebling of tuition fees in 2012 means that students will have accrued around £5,800 in interest on their loan before they graduate. Currently, graduates start to make repayments on their loan when they earn over £21,000 but after 30 years, the balance, whatever is left it, will be written off.

The major concerns picked out by the IFS include hundreds of thousands continuing to make repayments into their early 50’s as well as the black hole which is likely to emerge between the money lent to students and the amount paid back. Current stats show that 77.4% are not expected to pay back their debt in full compared to 41.5% who graduated from university in or before 2012. 

The IFS states that when student loans went up so did the repayment threshold meaning that those on lower incomes were initially better off. However, the repayment threshold has stayed the same since 2012 but the interest rates are now set to rise so graduates on all income levels are now worse off under the current fee structure.

With the interest rate on student loans set to rise to 6.1% in September this year, some parents are turning to commercial loans as a way to finance the study of their child/children. The Russell Group of leading universities has called for ministers to address this issue before university becomes unaffordable for many.

Chris Belfield, author of the IFS’ report, commented that the new interest rate to be charged on student loans is “very high compared with current market rates”. As a result, many have taken out bank and building society loans to finance themselves or their children as the interest rate for a commercial loan is substantially lower currently.

For those that can afford to repay this money quickly, it can be a great way to pay off student debt and release the burden however there is a lot of risk with this strategy as repayments are likely to be higher and the repayment term will be shorter.

Failure to keep up with payments for your loan or to repay the amount borrowed could see debt issues arise which are likely to affect your credit rating and your ability to obtain a mortgage or other forms of credit in future.

As fees and interest rates continue to rise, it may make going to university a more difficult decision for many potential future students. So here are five things to keep in mind when making the decision to go to university:

1. Can you afford it? The fees are expensive and graduating with over £50,000 worth of debt can seem daunting. For some it may be a figure that puts them off going to university altogether but remember, what you pay back monthly is taken at source from your wages so think about it as money you will never miss. However, it is ultimately up to you to decide whether the benefits of university outweighs the cost.
2. Is the course worth the cost? As fees hit £9000 a year, you want to make sure you are getting value for money. It’s a large amount to be paying back for such a long period of time and after all, it is an investment in your future so choose wisely.
3. Which accommodation is worth the cost? Being close to university and the city centre is great but this comes at a cost. Staying a bit further away usually means bigger and better accommodation for a cheaper price. If you are going to be living there all year, you want to bag yourself the best accommodation for your money.
4. Could you get a part time job to supplement your living costs? Many students have part time jobs to provide them with extra cash for their living costs. There are many flexible, part-time jobs on offer specifically aimed at students so why not reap the benefits to earn some extra cash and pick up some work experience.
5. Do you even need to go to university? You want to carry on studying but you can’t afford university, you feel like you should go to university but you’re not entirely sure, in these situations it is worth asking whether you need to go to university at all. There are many options out there including apprenticeships, college or simply entering the world of work.

If you are struggling with your student debts, get in touch with debt charity Stepchange who will be able to give you advice on this subject. For personal debts which you are struggling to afford, get in contact with us on 0800 901 2488 for free, confidential advice.

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