England Student Debt Unprecedented as Government Shifts Funding

When Alex Winning learned that her university tuition in England for the 2012-2013 year would be triple what her friends in college now pay, she says the idea of that much debt upset her.

“It’s a lot of money to pay back compared to people my age who won’t have that debt,” said Winning, 19, the granddaughter of Jamaican immigrants who will shell out as much as 9,000 pounds ($14,450) a year to study Korean language and politics. “It doesn’t seem fair.”

As the U.S. grapples with record-high college costs and outstanding student loans of $1 trillion, England is embarking on a plan this year that shifts much of the government’s burden of paying for higher education to students and saddles graduates with unprecedented debt.

Some students in England, after borrowing for housing and living expenses, will leave school with as much as 40,000 pounds ($64,200) in debt, said Peter Lampl, founder and chairman of the Sutton Trust, a London nonprofit group that promotes access to higher education. That tops the $23,300 average debt of U.S. student borrowers. The debt burden means graduates will defer buying a home and makes it harder for people from lower-income backgrounds to catch up, Lampl said.

“In this country, we will be on an order of magnitude ahead of the U.S.,” Lampl said in an interview. “We’re loading up these kids with debt. The whole thing is an absolute disgrace.”

More Forgiving

While many English students will be borrowing more to attend college, the system is more forgiving than its U.S. counterpart, said Steve Smith, vice-chancellor of the University of Exeter.

English graduates don’t have to repay their loans unless they make 21,000 pounds a year. They pay 9 percent of their earnings over that amount and all debts are forgiven after 30 years. Payments are automatically deducted from paychecks. Graduates don’t have to pay if they lose their job or transition to part-time work, as many working mothers do.

A young person making 27,000 pounds a year will end up repaying about 10 pounds a week and someone in their early 50s who owes 50,000 pounds has the reassurance that it will soon disappear, said Smith, who served as president of Universities U.K., an advocacy group that consulted with the government on the changes.

The plan covers students at England’s 129 universities and 186 vocational schools. Universities in Scotland, Wales and Northern Ireland have separate funding.

‘Brutal System’

By contrast, U.S. education debt can’t be discharged through bankruptcy and almost 2 million Americans with student debt are over 60, according to the New York Federal Reserve. About $85 billion in student debt was delinquent in the third quarter of 2011. In March, the Consumer Financial Protection Bureau said U.S. student-loan debt had reached $1 trillion, based on preliminary findings.

“The American system is brutal,” said Tim Leunig, who teaches economic history at the London School of Economics.

The Obama administration introduced an income-based repayment program in 2009 for U.S. borrowers who take out certain types of federal student loans. The plan limits debt payments to a percentage of a family’s income for graduates and erases the debt after 25 years. For those with government or nonprofit jobs, the debt can be forgiven after 10 years.

About 630,000 U.S. borrowers are enrolled in the program, while millions more are eligible, said Lauren Asher, president of the Institute for College Access & Success, a nonprofit organization based in Oakland, California.

‘Really Big Loan’

Sarah Chelh, 18, from Hackney in east London, said she was furious at the government for the fee increases and joined student protests. She said she gave serious thought to not going to college at all and looked at apprenticeships before deciding to pursue her interest in economics at a university.

To improve her grades, Chelh took an extra year before applying, a decision that will cost her three times as much for her first year at college as the government phases in the higher tuition rates.

“It’s not fair,” said Chelh, whose parents are from Morocco. “I could have potentially paid for a couple of years of tuition or my parents might have been able to pay. Instead, I’ll have to be taking out a loan, a really big loan.”

Free Before 1998

Higher education in England was free until 1998, when students were charged 1,000 pounds. The tuition increased to 3,000 pounds in 2006, and rose with inflation each year after.

In the U.S., the average tuition and fees for 2011-2012 at public universities is $8,244 (5,136 pounds) a year for state residents and $28,500 at private schools, according to the College Board, a New York-based nonprofit group whose members include U.S. universities.

The new English system, unveiled in June by the coalition government of Conservatives and Liberal Democrats, is designed to reduce taxpayer support while introducing competition among universities for the top students, said David Willetts, the Conservative minister for universities and science.

Universities can now enroll as many of England’s best students as they can attract, after years in which admissions were capped by the government. Universities admitting lower- achieving students will face reductions in their enrollment cap unless they charge less than 7,500 pounds.

‘Larger Agenda’

“It’s not simply a set of financing changes,” Willetts said at a March conference of European university leaders at the University of Warwick in Coventry. “There is a larger agenda. It is a model that does ensure the sustainability of our excellent universities in Britain.”

The Higher Education Funding Council for England, the agency that provides English universities with most of their government revenue, cut its distribution by 19 percent to 5.3 billion pounds for 2012-2013 from the previous academic year. Most of the cuts were in teaching funds, and are expected to be replaced by student tuition. The government will still pay for most university research, and will subsidize the teaching of some expensive subjects like sciences.

HEFCE’s budget is 0.8 percent of estimated U.K. government spending for 2012-2013, according to Treasury data. The U.K. spends 1.2 percent of its GDP on all higher education, including vocational schools, compared to 2.7 percent in the U.S., according to the Organization for Economic Cooperation and Development, using 2008 data, the most recent available. The figures include public and private sources of revenue, such as government grants, tuition and philanthropy.

‘Widespread Fear’

In the rest of Europe, where higher education is free or relatively inexpensive, governments are watching to see if the U.K. plan succeeds, said Jens Oddershede, president of the University of Southern Denmark in Odense, and the chairman of Universities Denmark, an advocacy group.

It’s creating “widespread fear all over Europe” among college administrators that the region will move toward a high- fee, high-loan system, Oddershede said. He pointed to the U.S. model, calling it “a system that can serve a capitalist society like America but wouldn’t work in a small country like Denmark.”

The prospect of rising tuition angers European students, who say they had no role in causing the financial collapse but are being made to pay for it.

“What caused the debt?” Allan Pall, head of the Brussels- based European Students Union, said in a speech at the European university conference. “Did we spend too much on higher education? We should ask that question instead of rushing to cut the first thing we see, the thing that creates jobs and growth.”

Student Applications

While students have protested, applications through Jan. 15 fell just 1 percent, when adjusted for a decline in the college- aged population in England, according to the Universities and Colleges Admissions Service, which manages university applications.

That’s not surprising, given the importance of a college education for finding a high-paying job, Lampl said.

“Poor kids, low-income kids know they have to get an education,” Lampl said. “They’re not stupid.”

Asta Diabate, 18, who lives in Lewisham in south London, said the higher fees don’t faze her.

“I’m not worried, because it’s something that’s valuable,” said Diabate, who will start college in 2013. “It’s not like I’m going to pay upfront and installments are so low, it shouldn’t really bother me” when repaying the loan.

Repaying the Debt

While the plan was devised partly to reduce government spending, it may ultimately cost more because many borrowers won’t pay back all they owe, said Nicholas Barr, a professor of public economics at the London School of Economics. About 70 percent of the loans will be repaid because of the 21,000-pound income threshold and the 30-year forgiveness period, according to government estimates.

Instead of expanding access for students, university spots will continue to be restricted, which will hurt the economy and social mobility, Barr said.

Last year, 498,119 students applied for university spots and 368,316 were accepted, according to the application service.

Winning, who hopes to begin her Korean studies in September at the University of London’s School of Oriental and African Studies, said her mother struggled to pay back a much smaller student loan after she went to college.

“I’m afraid one day that I’m going to be stuck in that mess,” Winning said.

To contact the reporter on this story: Oliver Staley in New York at ostaley@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.