It’s Time to Modernise the Student Loans Payment System

By David Webber, Managing Director at Intelligent Environments

This autumn,a record 500,000 school leavers started university. For many, university is the first time they have independent control of their finances, and it’s also one of the largest financial commitmentsthey will ever make.

Given this,it is surprising that 63 percent of students are unaware of how much debt they will have taken on after leaving university,according to our research. This is significant, as recent figures from the Institute for Fiscal Studies revealed the average student leaves university with a debt of £44,000. This is almost double that of people who graduated before the new annual £9,000 fees came into effect.

As the number of university students increases, so too does the total level of debt.Upon leaving university, students are currently required to pay back nine percent of any income they earn over £21,000, with all debts written offafter thirty years. The current debt burden is £3.2 billion and according to a report from the Parliamentary Business, Innovation and Skills Select Committee, if the current trend continues it will rise to £330 billionover the next thirty years.

In order to prevent this debt being written off at the taxpayer’s expense, serious changes need to be made. The parliamentary report states the government currentlyloses 45p of every £1 they loan to students; a figure much higher than the 28p predicted when the fees were increased to £9,000. In fact, the report also warns that the continued existence of the student loans system is under threat from the array of problems it faces.

It’s not just limited to the UK. Student loans bodies in other countries are also struggling to reclaim the debts incurred under their own systems.This is partially because some debtors believe they’ll never rid themselves of the full amounts. In the last decade, student debt in the US has more than quadrupled, and recent figures from the United States Government Accountability Office show there are now more than 700,000 households with people aged over 65 still repaying student debt, and owing a total of more than $18 billion.

The student debt situation is gathering increasing attention. A US activist group recently publicly questioned “the morality around repayment”bybuying and cancelling other students’ debts. The organisation, called Rolling Jubilee, has purchased and abolished $3.8m of debt, paying just over $100,000, or as it stated, “pennies on the dollar”.

To tackle the problem before it spirals out of control, the UK’s Student Loans Company (SLC) needs to look at the way in which it lets graduates manage their student debt. According to Intelligent Environments’ research, 58 percent of graduates don’t currently feel they have the support they need to pay off their university or college loans. Providing better visibilityover student loans and more flexibility for repayments would put graduates back in control of their debt and may help to prevent loans being written off.

Despite living in an age where we can instantly check our bank balance and mobile phone credit, many students struggle to get true perspective on their indebtedness. In fact, 69 percent of graduates would like better visibility of their debt. In spite of the enormous financial burden, students only receive annual updates of their balance at the end of every tax year, when the SLC and HMRC work out how much of their loanthey have repaid.

To help students better manage this debt, the SLC should provide better visibility of loan repaymentsthrough digital tools. At present, the only way for students to estimate their debt balance is to look at the most recent statement and deduct from this any repayment marked on wage slips or a P60. However, if an individual wants to make an additional voluntary repayment they must contact the SLC and provide information including name and student reference number.This is a lengthy and inefficient process which does not make managing large debts any easier for students.

At a minimum, students should be able to view live balances, have flexibility over the amounts paid and be able to choose to pay off the debt sooner.In fact, the UK is lagging behind its international counterparts in this regard. In New Zealand, for example, students can check their loan balance and view repayments, interest charges and write-offs online by logging into their account at any time.

Better technology can provide new students and graduates with greater simplicity, oversight and increased control of their finances. To prevent the £3.2bn debt burden being written off at the taxpayer’s expense at a later date, the government and the SLC need to improve awareness andstart implementingthe widely available digital tools that are being used by financial sector institutions.