Stop peer pressuring young people into the student debt swindle
One in four graduates will end up worse off than they would have been had they not gone to university, but that’s not just down to imperfect information, it’s down to expectations that need to change, says Paul Ormerod
The holiday season is now in full swing. Relaxation for most, but in many households tensions will mount as a deadline approaches. August 13 is the fateful day when A-level results are expected, and students find out whether they have made the grades for their university offers.
A record number of 18-year-olds are wanting to go to university, up by five per cent on last year.
The rise is mainly due to simple demographics. The number of 18-year-olds has increased. But the puzzle is why so many of them still choose this route rather than getting a job.
It should by now be well known that when they emerge from university clutching their shiny new degrees, they also carry a very large burden of debt. Students are now graduating with an average debt of £53,000, mainly due to tuition fees.
Substantial numbers will never earn enough to pay off this debt. But their situation is even worse than that. Even if they do succeed in paying some off, the interest rates charged on the loans are such that the total amount outstanding can still increase.
The debt trap
Last year, some 4m graduates made repayments. But two-thirds of these accrued more in interest than they paid. The total amount repaid was £5bn, but interest charges amounted, incredibly, to £15.2bn.
Why, then, do these young people bother to go in such large numbers?
If you have a place to read economics at Cambridge, the answer is obvious. The average salary five years after graduation is £105,000 a year.
But an Institute for Fiscal Studies (IFS) report last month showed that one of four of those who graduated 20 years ago will be worse off over the course of their working lives than if they had not gone to university. And the situation is almost certainly worse now for the recent generations of graduates.
Earlier in the summer, the Treasury Committee of the House of Commons published a report on its inquiry into student debt. The findings were built around responses to a survey from 50,000 graduates.
It found that 57 per cent of graduates did not understand the terms of the loans they were taking on, while 51 per cent would not have taken on the debt if they had known what they did now.
57 per cent of graduates did not understand the terms of the loans they were taking on, while 51 per cent would not have taken on the debt if they had known what they did now
These figures are quite staggering. Universities select young people who are almost exclusively in the top half of the population in terms of intellectual ability. Yet many claim not to have appreciated the conditions of their loans. And half of the large sample suffer from a rather acute case of buyer’s remorse.
It might be argued that they were only young when they took out the loans. But most would have been of voting age at the time, judged to be sufficiently mature and responsible to be allowed to decide who should form the government.
So university applications remain high because of what economists describe as “imperfect information”. The potential students either do not have the relevant information on their loans and their earnings prospects, or they have it but do not understand it properly.
This is something which must eventually fade away, as more and more publicity is given to these points.
But there is a second key reason, namely peer pressure.
This takes several forms. Schools expect their brighter pupils to apply to university. Many parents expect it, especially those who are graduates themselves. And, quite simply, if most of your friends are applying, so will you.
It is these expectations which have to be altered radically. Otherwise cohort after cohort of young people will continue to make the same very bad choice.
Paul Ormerod is an Honorary Professor at the Alliance Business School at the University of Manchester. You can follow him on Instagram @profpaulormerod