At £1.1 trillion, mounting student loan is reaching crisis proportions in the U.S., casting a global spotlight on the problems with a higher education system that forces eight out of 10 students to leave school with a pile of student loan debt.
However, the mushrooming student loan debt problem is not limited to the U.S., as an increasing number of countries are reporting substantial increases in the number of students taking on student loans.
For example, Japan, where the average tuition is less than £4,700, estimates that more than £3.9 billion in student loans are past due.
Even in countries like Sweden, where the cost of tuition is free, nearly 1 million students have loans amounting to nearly £3.13 billion, in large part to help cover the cost of living and other college expenses.
U.K. Surpasses the U.S. in Average Student Loan Debt
However, it is the United Kingdom that most closely matches the U.S. – certainly not in the total amount of debt of which the U.S. is unmatched; but very much so in the severity of the problem.
The total amount of student loan debt in the U.K is approaching £86 billion; just a fraction of the total student loan debt in the U.S., but then so is its economy, which is one-sixth the size of the U.S. economy.
However, under recent reforms to the U.K. education finance system, the average student loan debt held by U.K. student borrowers, is expected to increase to £43,808, which is more than double the amount carried by U.S. student borrowers.
Nearly all of that debt was accumulated prior to the government instituting several reforms in its education finance system to reduce government expenditures.
- The first major reform replaced free maintenance grants used to offset tuition and living costs with loans beginning with the 2016/2017 school year.
- Secondly, the government placed a freeze on the repayment threshold – the amount of earned income received when loan repayment must begin – at £32,600.
- The government has also allowed the universities, which had been asked to freeze tuitions over the last several years, to increase their fees in line with inflation.
The combination of these changes has resulted in increased costs, more money borrowed per student, while accelerating the amount that must be repaid.
Borrowers in Both Countries Not Paying in Full
It is estimated that 70% of student borrowers in the U.K. will never pay off their student loans.
Whereas student borrowers leaving college just 15 years years ago managed to pay off their debt within 13 years, today’s borrowers are more likely to take the full 30 years of repayment and then have their debts written off.
Student borrowers in the U.K. have a more difficult time than their U.S. counterparts eluding student loan debt collections if they don’t make payments because the government deducts payments from payroll.
Although the default rate in the U.S. is substantially higher, with more than 10% of borrowers in or bordering on default, borrowers who default never have their loans written off. They will have their tax refunds and, eventually, a portion of their Social Security benefits garnished.
At least in the U.S. students can convert their loans to an income-driven plan to lower payments and then have their loans forgiven after 20 or 25 years of payments.
U.K. Borrowers Have Lower Repayment Costs
Another difference U.K. student borrowers have in their favor is the lower interest they pay on their loans. Currently, the loan rate on student loans in the U.K is a maximum of 3% over the prevailing inflation rate.
Although the current loan rate for unsubsidized direct loans is 4.76%, which is comparable to loan rates in the U.K., there is no such cap on private student loan rates in the U.S. As interest rates rise, student borrowers can expect to pay more in interest costs over the length of their loans.
Increasing Tuitions Leading to Increased Borrowing in Both Countries
The primary cause of increased borrowing in the U.K. is the steep increase in tuition fees over the last ten years, which rose from about £2,972 to nearly £8,996. That puts the cost of a U.K. college education on par with the cost of a U.S. student attending an instate school.
However, a big difference is that, in the U.K. parents aren’t as conditioned as U.S. parents to save for college expenses, and many are unprepared to cover even a small portion of costs.
With the government grants being replaced by loans in the U.K, even the low-income students will be forced to borrow, while low-income students in the U.S. receive financial aid that can cover most of their expenses.
In the U.S. student borrowing is expected to increase as college tuition costs increase, which continues at a rate far exceeding inflation.
College tuition costs in the U.K. can only increase at a rate comparable to inflation, which could keep a lid on the growth of student borrowing beyond current levels.
The comparison between U.K. and U.S. student borrowing isn’t quite as apples-to-apples as the numbers suggest. The figures don’t factor in many of the differences between the two financing systems, nor do they account for the difference in graduate job prospects.
However, in both cases, borrowing is increasing due to rising tuition costs, which aren’t expected to subside anytime soon; and both countries are now facing the possibility of a student debt bubble that could have a devastating impact on their economies.
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