student loan debt psychological impact

The Long-Term Psychological Impact of Student Loan Debt

Posted on 14th August 2018

Higher education is now a requirement for most new job applications, but how does student loan debt impact university graduates?

According to a study by the Institute for Fiscal Studies (IFS), three-quarters of graduates will never clear their student loan debt. 

High tuition fees and enormous student loan debt will leave many graduates paying back their debt well into their 50s.

In fact, the average amount students are paying back now is an eye-watering £57,000!

As graduates begin to enter the workplace, many are saddled with this debt before they have even started earning. The IFS report found several key findings:

Key findings:

  • £57,000 – the debt levels students from low-income families will graduate with
  • £5,800 – the amount the average student will pay in interest
  • £40,000 – the amount those on higher incomes could pay in interest
  • £1,500 – the amount lowest-earning graduates saved after 2012 government reforms
  • £28,000 – the amount universities get on average per student per degree

Graduates then, with a mountain of debt, competing with others to get the highest paid jobs, suffer an enormous psychological strain should their life goals not come to fruition – thus leading to a long-term psychological impact of student loan debt.

The basics of student loan debt

Once students graduate, every loan they took out over their study period will be combined into one sum. This sum is the amount graduates will have to repay, managed by the Student Loan Company (SLC).

The repayments begin in April after students graduate after university.

The good news is that if you earn less than £21,000, you will not have to repay anything.

It is only when graduates earn over £21,000 that they will begin to pay back their student loan debt, and this is only on amounts over it. Roughly 9% of the sum over £21,000.

This is what is known as the income contingent repayment. Meaning that student loan repayments are based entirely on income earned, and not what they owe.

Simply put:

The more you earn, the more they repay.

For example, if graduates earn £22,000, they only have to pay 9% of £1,000 every year.

But, if they earn £25,000, then they have to pay 9% of £4,000 every year.

Should graduates be unable to repay all the debt (maybe they do not earn over the threshold), then their loans are wiped out after 30 years.

The 5 most common worries about student loan debt

“I worry about student loan debt interest charges.”

Interest rates on student loans are linked to March’s retail price index inflation figure.

At present they are charged 6.1% – the March 2017 RPI figure of 3.1% plus 3%.

Whilst interest is added to graduates Student Loans Company account, repayments (called contributions) depend solely on your earnings. So if more interest is added and the loan amount keeps on growing, there is no need to worry as the repayments remain the same if graduates income remains constant.

In other words, this nominal interest is irrelevant.

Like the suggestive word “debt”, the word “interest” evokes painful memories of bank loan interest rates and puts off many applicants from attending university.

“It’s not only student loan debt, its bank overdrafts too.”

Student overdrafts are interest-free, but once you graduate, interest is applied unless repaid in full.

With bank overdraft fees increasing to a whopping 19.98%, now even more than borrowing for a payday loan, potential university applicants not only have to contend with student loan debt, but also bank overdrafts of £3,000, the maximum banks will lend.

Most banks give you a chance to repay it gradually and help you with potential expenses when you start your new job.

Still, the idea of another expensive debt has led to graduates to consider other forms of credit to cover their monthly expenses once their overdrafts start charging them interest.

“Will student loan debt impact future credit borrowing?”

Post-graduation, many graduates will begin to save for their first home, borrow a loan to buy a car or start saving into a pension. Student loan debts do not appear on credit reports, hence should not affect the scoring when lenders assess applicants for a mortgage or loan.

However, since the credit crunch has impacted households, lenders are taking into account an applicant’s monthly outgoings, and this is where student loan repayments will be considered. Those graduates repaying student loans could find that the amount they wish to borrow could be reduced.

Students then will have to take into account when borrowing, although the student loan debt is not counted on their credit reports, they should take into account repayments.

“I won’t earn enough to repay my debt.”

 Time and time again, students and their parents are put off applying for fears of not being able to repay amounts up to £57,000.

This is an unnecessary fear.

The full amount owed is not repayable on graduation day, only if they earn over £21,000. Moreover, even then, it’s proportionate to earnings, so graduates only repay 9% of everything above £21,000.

Again, if the debt is not cleared, the amount is wiped after 30 years.

However, the word debt is so strong that the psychological effect it has is puts many off from applying in the first place.

“What if I want to travel?”

Now, what if you graduate, find a job, work for a year abroad or decide to go travelling?

If graduates go abroad to work, then they will need to contact the Student Loans Company about their whereabouts, as they may require to continue making payments.

Again, there’s no need to worry if the amount you earn abroad is less than £21,000, but failure to inform the SLC of travel or working abroad may count as “non-compliance” and will witness a penalty charge applied to their accounts.

Graduates are missing out on from life-changing opportunities abroad over concerns of not keeping up to date with repayments and obtaining fines, thus increasing their student loan debt.

Conclusion

Taking on student loan debts of more than £50,000 is off-putting to any university applicant.

But, the headline is a lot worse than the reality as student loan debt is only repayable once graduates earn a certain amount.

Unfortunately, worries about student loan debt and its psychological impact later on in graduate lives has put many off from applying, with 51% of applicants put off because of the increasing costs involved.

In fact, in 2017, there were approx 470,000 fewer university applications (compared to 2016), demonstrating that student loan debt is putting off many from going to the university.

The sadness is that as a nation, we are losing many talented potential graduates because of the psychological fear of student loan debt.

If you’re in doubt about applying for university due to the long term impact of student debts, then put those worries aside.

With the average salary for post-graduates in the UK starting between £19,000 to £22,000 per year, you probably won’t need to start paying it off for a while anyway!

Author: Katre Kaarenperk-vanatoa

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