24 July 2019

Do we expect to live in debt?

Each UK household now has an average unsecured debt of £15,400, which has risen by £886 per household over the last 12 months, and by some £10,000 since 1998. Years of financial austerity and wage stagnation, when contrasted with the rising cost of living (prices having risen 30% since 2008) have led to a mismatch between earnings and expenditure.

Indeed, the rise in the so called ‘gig economy’ and the increase in zero hours contracts have contributed to the issue. It is clear that rising prices/costs have contributed to the increased use of credit. The level of unsecured personal loans has risen from £4.5bn in 1993 to £16.68bn in 2018, showing that the population is resorting to credit in order to live.

Are we living beyond our means?

Have we now reached a stage where we simply expect to live in debt rather than be able to fund today’s lifestyle through savings and without borrowing? Most expensive purchases are now funded by credit. For example, in 2017, over 80% of new car purchases were funded via finance. Mobile telephones are frequently purchased via finance. Consumers are used to being given the option to purchase consumer goods via credit, given how much items now cost. The level of unsecured debt as a share of household income now stands at 30.4%, the highest it has ever been.

As part of this, graduates can now expect to leave degree courses with debts of £50,000 (although they do not need to start repaying the loans until they earn at least £25,000 per annum). Embarking on an educational route with such serious financial ramifications therefore requires some thought.

Whilst student debt may not need to be repaid immediately, it is a feature of today’s higher education system that, in order to obtain a degree, entering into some form of student loan will be required. It is a sobering thought that the value of outstanding student loans in England at the end of March reached £121bn.

Does debt deter students?

From a small sample of recent graduates, it is clear is that the cost of obtaining a degree does not necessarily put students off going to university. All of those asked said that, despite having to live in debt to obtain a university education, they were not deterred from choosing this route.

One respondent said that it was a “necessary evil” in order to advance and open doors for a future career. Others adopted a ‘speculate to accumulate’ attitude: that a university education may result in a higher paid career, which made incurring the debt worth it in the long run. Some commented that, because repayment was not required immediately, the fact of the debt seemed almost unreal, or at least, far off in terms of actual real cost.

These responses may reflect the fact that being in debt is now socially acceptable – people do not expect to be able to pay outright for items required for life. So entering into loans, and living with a degree of debt, is commonplace.

Is degree choice a factor?

Of course, the choice of degree subject is likely to have an impact on this. Those choosing courses for ‘the professions’ (such as medicine and law) may see a more profound benefit, not least because of the requirement for a degree to become qualified. Only the very affluent could avoid taking on student debt in order to pursue a career in those professions. A degree with a less obvious career pathway may see a slower economic return.

Student loans are also unusual in that they do not appear on that person’s credit history (unless the loan was taken out before 1998 and there has been a default on payment). So they do not have the same financial impact as other forms of credit.

But the level of loan repayments made each month will have an impact in terms of a student’s future mortgage applications. A mortgage lender will look at student loan repayments as one of the elements of the mortgage affordability. This means that students who go on to earn a larger starting income will see a larger impact on the amount that they can borrow for a mortgage. Typically, student debt can have an impact of between £5,000 and £30,000 on mortgage offers made to students once they enter employment.

Are loans enough?

While student loans enable students to go on to higher education, the loans themselves are usually not sufficient to live on alone. The minimum maintenance loan stands at £3,575 per annum – in most cases, rent will absorb all of that and more, so students have to supplement their loan income in order to survive. The most obvious sources are seeking paid employment (83% of those surveyed worked to boost their income), seeking financial support from family or even choosing a university which means that the student can continue to live at home (in most cases rent free).

Of course, for those students having to work to supplement their income, this has a detrimental impact on studies. 66% of those surveyed said that they felt that having to work whilst at university had negatively impacted on their studies.

Student finance, and the need for loans to be taken out by 18 year olds at the start of their adult life, means that a new generation has effectively grown up accepting the need to be in debt, and assuming that this is the way to manage finances in the future. This perpetuates the acceptability of living in debt, and that everyday life is not something that can be afforded by current wage levels.

For advice or information, please contact Fiona Hayles, Partner, Dispute Resolution, on fhayles@hcrlaw.com or 07725 242 079

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About the Author
Fiona Hayles, Partner, Head of Banking Litigation

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