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US student debt forgiveness: should the UK follow suit?

A recently announced policy package will ease the burden of student debt for millions of Americans. Due to differences between the national systems of loans for higher education, a similar policy in the UK would not have the same effects, as it would be less well targeted at those on lower incomes.

The US government has just announced plans for a significant student debt relief package, worth around $300 billion, alongside substantial reforms to the country’s system of loans for higher education. The headline features of the plans are:

  • Forgiveness of $10,000 of federal student debt for those earning less than $125,000 in 2021.
  • Increased forgiveness of $20,000 for recipients of federal means-tested Pell grants. These are non-repayable contributions from the federal government towards the cost of going to college (tuition, books, rent and so on) for low-income students up to $6,495 (in 2021/22).
  • Simplification of and increased subsidies to the mechanisms of federal student debt repayment.

Could a similar policy package be effective in the UK? As we explain in this article, there are key differences in the student loan landscape between the two countries, which suggest that a scheme of this kind would be less well targeted in the UK:

  • First, loans in the United States are more likely to be taken up by low-income students, while almost all students in the UK take up loans.
  • Second, dropout rates are much higher in the United States than in the UK. This means that many American students leave university with debt for the years that they studied, but without being able to reap the financial rewards from a degree.
  • Third, private sector refinancing of loans is a feature of the US system but not the UK’s.
  • And finally, the UK has a well-functioning and progressive income-contingent loan repayment system.

How does student debt work in the United States?

In the United States, 43 million people have federal student loan debt. This totals $1.7 trillion, up from $0.5 trillion in 2006.

On average, students owe $31,100 at graduation now, compared with $26,900 in 2006 and $6,760 in 1990. As a result, students who graduate now owe around 55% of their starting salary in debt, compared with 25% in 1990.

The repayments do not affect everyone equally. Someone on an average salary, making payments of 10% of their monthly income, could pay off their debt in just over six years. In contrast, a low-end earner would need to pay 15% of their monthly income to repay their debt within the typical ten-year repayment window.

It is perhaps not surprising then that while 55% of Americans support the cancellation of up to $10,000 in federal student loans, support is very much divided by income group. Over half (56%) of those who strongly support the package earn less than $50,000 annually (median earnings in the United States are around $41,000). By contrast, only 14.3% of those who strongly support the package earn more than $100,000.

The policy is also contested among economists. Some in the United States see the package as a step in the right direction towards undoing some of the damage done by a ‘dysfunctional’ funding system. Opponents argue that it will be regressive, redistributing tax dollars from lower-income families who didn’t attend college to higher-income graduates.

Would a similar package work in the UK?

Our analysis suggests that if a similar reform were to be implemented in the UK, it would be less well targeted at lower-income students. This may be a disappointing conclusion to many younger graduates with large outstanding student debts, who would be relieved to see a reduction in their loan balance, especially in the middle of the biggest cost of living crisis in a generation.

But the student funding landscape and the demographic profile of those in educational debt is very different in the UK compared with the United States. This means that a similar policy would be a very different social and economic proposition. Here, we highlight four key differences.

It is much more common for US parents to pay for their child’s university education

Nearly all (95%) new students in the UK take up government loans. In contrast, 30% of US undergraduates do not use federal loans, with 85% of families using parent income or savings to pay for some proportion of college costs.

In the United States, students from more affluent backgrounds are more likely to leave with no debt. So, in the United States, helping those with debt is a progressive policy, at least within the university-attending population.

In contrast, helping debtors in the UK would mean offering support to all undergraduates equally, rich and poor alike. Consequently, it would not be a progressive policy within the university-attending population.

It would also be poorly targeted considering the population as a whole, since undergraduates tend to be from more affluent backgrounds than those who do not go to university.

The dropout rate is very low in the UK

In 2019/20,5.3% of UK undergraduates taking their first degree were no longer in higher education a year later, and 11% ultimately did not obtain a qualification.

In comparison, 24.1% of first-time undergraduate freshers in the United States drop out within the first 12 months of their studies, and 32.9% do not complete their degree programme. In other words, individuals in the United States are far more likely to be repaying student debt for a degree that they did not obtain.

Indeed, it has been estimated that 16.6 million people in the United States have debt but no degree six years after first entering college. This means that the link between student debt, degree-level qualifications and a graduate earning job is much stronger in the UK.

Figure 1 compares the proportion of the US and UK adult populations with degrees over time, which is similar despite lower initial participation in higher education in the UK. This reflects the higher rates of dropout in the United States.

Figure 1: Proportion of US and UK adults with degrees over time

Source: Office for National Statistics (ONS) and US Census Bureau
Notes: UK – percentage of those aged 21-64 in the population with higher education; US: percentage of over 25s with a college degree

In the United States, there are private sector options for refinancing student loans

Many well-informed higher-income graduates in the United States have refinanced their loans at lower rates using private companies such as SoFi. Private companies can afford to offer rates lower than the federal government as they are selective in whose debt they take on.

The US policy of limiting the cancellation to the federal debt therefore targets those debtors at most risk of default.

In the UK, all student loans are held by the Student Loans Company, meaning that, once again, debt forgiveness would not be progressive within the university-attending population.

The UK has a well-functioning income-contingent student loan system

Undergraduates in the UK take on twice the amount of debt of American students. The relatively low uptake of loans in the United States means that the average student debt of an undergraduate in the United States is £23,640 ($27,000) at public colleges, £29,500 ($33,700) at private non-profit colleges, and £34,930 ($39,900) at for-profit private colleges. This compares with £43,650 in the UK, where all but five universities are public.

The major reason why there is a ‘debt crisis’ in the United States but not in the UK is that in the latter, students are automatically enrolled in an income-contingent loan scheme. Under this system, they only pay a proportion of their income over a threshold on student debt repayments (Murphy et al, 2019). So, if graduates fall on hard times, their debt repayments are reduced or can even stop.

In contrast, the majority of students in the United States are on a fixed period (ten years, for example) repayment plan, and will have to pay the same amount every month come rain or shine.

This means that both graduates and those who have dropped out can face a very large repayment burden straight after leaving university, sometimes representing half of their income (Barr et al, 2019).

That the UK system already has a progressive forgiveness system built into it means that any general debt forgiveness would be relatively less progressive. This is certainly the case compared with the United States, where debt forgiveness will have a much greater direct impact on the day-to-day financial situation of graduates.

The only effect it would have on UK graduates is to reduce the number of years over which they repay. It would have no effect on their monthly repayments.

Ironically, the parts of the US reform designed to simplify contingent loan programmes (which cap monthly payments on some loans to a percentage of a borrower’s discretionary income) have received less attention. But these measures (such as reducing the cap on undergraduate federal loans to 5% of a borrower’s discretionary income, down from the typical 10%) have the potential to reduce the repayment burden for more graduates for many years to come, by moving the risk of low graduate earnings from the individual to the state.

Where can I find out more?

Who are experts on this question?

  • Richard Murphy
  • Gill Wyness
  • Susan Dynarski
  • Judith Scott-Clayton
Authors: Richard Murphy, Stuart Campbell, Gill Wyness and Lindsey Macmillan
Picture by f11photo

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