EdAid’s solution for the inevitable student loan implosion

Tamara Risso-Gill, Marketing Manager, EdAid

It is a truth universally acknowledged that further education is beneficial to all. There is, however, a cost to this, and working out how to balance that cost benefit ratio is a never-ending battle.

The UK takes pride in offering some of the finest educational establishments in the world. But in recent years, whilst trying to open up a historically elitist system, it has proved impossible to continue offering this education so highly subsidised. The substitute model of interest levied, salary based repayment loans is now beginning to display its flaws.

http://www.kcl.ac.uk/sspp/policy-institute/publications/Issuesandideas-alison-wolf-digital.pdf

Last month, in her paper Heading for the precipice, Alison Wolf, Professor of Public Sector Management at King’s College London, highlighted the need to urgently reconsider funding education for those beyond school age. The report presents the facts around increasing numbers of students attending higher education and the rapidly rising cost to study along with reduced graduate job prospects, lowering the chances of repaying the debt.

She not only acknowledges how the current situation is financially unsustainable, but also that the financial incentives and administrative structures in place are worsening the situation.

Some have twisted Professor Wolf’s report to suit the argument that less people should be going into higher education.

As does she, these naysayers draw on the distinction between higher education, further education, apprenticeships and other forms of post-19 education. Wolf suggests that, unlike technical training, higher education does not equip graduates with all the skills necessary to succeed in many spheres of the working world.

Apprenticeships and vocational courses are often cited as a more useful route, yet they similarly remain under-funded and over-subscribed to.

This has been taken out of context by detractors to argue that the lack of vocational skills provision by most degree courses make them a waste of time for most of the population, save an elite, academic few. Some go as far as suggesting that the solution is to raise entry qualifications and impose restrictions on loan access.

There is a far better alternative, however, as offered by EdAid which both encourages and empowers the student, removing responsibility for funding from the government, directly to those who wish to study.

Our solution

The benefits of the EdAid offering do not just stop at handing over control to the student but have far-reaching economic and social consequences. To fully understand these, it is necessary to grasp the current situation.

Since 2012, higher education establishments have been able to charge up to £9,000 in fees. To cater for this and annual living costs, students can take out loans supplied via the government funded Student Loan Company (SLC), if they meet the eligibility criteria.

To meet the cost of supplying these loans, the SLC charges interest throughout the time the student is studying. For now, this has been set at 3% over inflation (RPI). When it comes to repaying the loan, the terms appear favourable: currently 9% of any income earned over £21,000. For the average recent graduate earner with a salary of £25,000, this means monthly repayments of £30.

It might seem very attractive to only be losing this small amount of the monthly pay packet, until it becomes apparent that interest is accruing far faster than the debt is being paid off.

Inflation aside, for the typical student who borrows £15,000 a year over a three year course, the interest accrues at approximately £112 per month. In short, a typical student is adding nearly £1,000 to their debt year on year.

In recognition that this could appear like a never-ending fee, the SLC has added a clause that says any remaining debt is written off after 30 years. On present calculations, the government is expecting that 50–55% of its loans will end up being written off. This, combined with statistics around graduate job prospects, sends out a very negative message to the prospective student.

Some have referred to student loans as a graduate tax

Fuelled by media hype, there is now a perception that it is fine to take out a student loan as there is little or no risk, since, if you never earn much, you’ll never have to pay it all back. No one appears to be reporting on how extraordinary this message is in the face of irresponsible borrowing in recent years leading to the global economic crisis, let alone the lack of aspiration it encourages.

Compare this to the EdAid model

That invites the undergraduate to raise the money to study themselves, through their familial network and the community beyond. The benefits of this transition of responsibility are immense to both borrower and lender. A student looking to borrow money will need to showcase their value as good investment. Those who support that student will in turn have a vested interest in the student’s success.

And it is not just family and friends who will be interested. Companies, many of which have huge programmes in place trying to attract the best graduates, along with an interest in presenting themselves to the student market, can start to build a relationship with those they value most.

This creates a mutually supportive structure of financially and emotionally indebted desire for accomplishment and prosperity. This is in stark contrast to the SLC offering whereby the borrower feels no indebtedness to the lender, is encouraged by the media to be disparaging towards repaying, and is uninspired to achieve financial independence upon graduation.

In a world where people are living and working longer, taking time to study prior to having dependants both young and old to cater for should be encouraged. Not all education is going to have an immediately tangible benefit. However, if a student is aware of the cost of their education then it becomes their choice to study, and figure out how to repay those who have supported that choice.

It is time to believe in the value of higher education, and empower our future graduates to value themselves and their choices, as opposed to clinging to systems that compound the rising debt problem and write off those who add to it as losers.

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