Increasingly people are questioning whether or not a degree is worth the current price tag. But those taking part in that conversation really ought to be turning their attention to the ways in which the UK could make it easier for graduates to repay their student loans.
Policies around student loans should incentivise employment, and the UK can learn from the US’ experiences on this front. There are several ways that we can do this that will expand on current thinking on supporting students in the long term. Four options that put students first deserve consideration.
Option one – interest-free loans
All student loans, regardless of the lender, should be interest-free.
An educational loan is more important than a car loan or a mortgage. It is the opportunity to allow someone to improve their employment outcomes. It is also an opportunity to build one’s wealth, both intellectual and capital. Unfortunately, the capital wealth is stifled because of the interest rates that are consistently attached to student loans. The interest-free loans should be applied throughout the life of the loan. You should have to pay back only what you owe and nothing more.
Option two – loan forgiveness
There should be a loan-forgiveness plan for students as well.
Not just the current waiver, which deletes all loan arrears 30 years after graduation, but also loan forgiveness that is based on employment. Students who get jobs in the NHS, the public sector, public universities, government-owned or sponsored organisations and in sectors such as charities, community and youth organisations, should have their loans forgiven after five years of commitment in the role.
This forgiveness could be anywhere from 25 per cent to 50 per cent of the loan. This not only encourages people to join the public sector or university work, it also ensures that students will have an incentive to find employment and to think holistically about where those employment opportunities might exist. This also addresses issues where people won’t find work or employment.
Option three – percentage of salary
In the US, students are expected to start repaying their student loans six months after they graduate. This grace period gives them breathing space to find graduate-level employment.
Instead of waiting for students to pay back their loans above the current threshold of about £25,000, after which 9 per cent of income is repaid, the government could decide to take a small percentage that goes towards the loans within the first job.
It could be done as soon as they secure work or six months into the job. Either way, a small fraction of 5 to 10 per cent of salary that is diverted to the loan helps to shrink the 30-year time frame the loan is projected to be paid.
Option four – choice of repayment options
The last option is to set repayment options with students.
There must be more options for graduates to pay back their loans. These repayment options should be varied and fit within the graduate’s budget. In this option, a graduate would determine, based on salary and other factors, how much they would like to repay every month for each calendar year.
After the first year, the set-up could be re-examined or re-evaluated to allow for adjustments to ensure that the loan is being paid in a way that is manageable for the student. This would be in place as long as they are employed. This would also help with eliminating all the loans after so many years.
Loans could be forgiven if the student pays the agreed amount for five years without being late or missing a payment. Then, forgiveness of a particular percentage could be given for actually being on time.
There needs to be a clear way forward that places students first but also leverages the incentives that ensure that loans are repaid. The current approach will not stop the UK’s student debt crisis.
Charles B. W. Prince is the director of the Centre for Student Success at the University of East London and a doctoral student in the global executive education programme at the University of Southern California.