Student ‘debts’ aren’t really debts

“Let's just be very plain on the impact of student finances on mortgages. When you get your student finance, it works not like a loan but like a graduate contribution system... It does not go on your credit file. It is effectively like mildly increasing the amount of tax that you pay, just like increasing pension contributions also decreases your disposable income. It is not a big issue for getting a mortgage.”

Martin Lewis, 3 May 2018

The personal finance journalist Martin Lewis appearing on BBC Question Time criticised politicians for framing student loans as a debt when they don’t actually work like debts. He has a point.

The student finance system is devolved and is one area where different parts of the UK differ dramatically. For example, this argument happened in St Alban’s in England, where students are responsible for their own tuition fees and that’s what we’re looking at here. People who live in Scotland and study in Scotland aren’t usually required to pay tuition fees.

As Mr Lewis said, student loan repayments don’t work in the same way as what we usually call a debt. The government’s own website makes clear that “the size of your monthly repayments will depend on how much you earn, not what you owe.”

That’s why the MoneySavingExpert website is right to say that the headline figure for what students might ‘owe’ at the end of university is “mostly meaningless”. The Institute for Fiscal Studies has calculated that “more than three-quarters of students can expect to have some debt written off” because the repayments due with the amount they earn won’t fully repay the ‘debt’.

It’s also true that student loans do not go on your credit file. The Student Loans Company confirmed to us that: “A student loan will not affect an individual’s credit rating as long as they meet their contractual obligations.”

The obligation to pay a bit of your income (once it reaches a certain level) in order to repay student costs does reduce your disposable income. So a lender might ask if you have student loan repayments because they reduce the amount of income you have free to repay other debts.

Which? have calculated having to make student loan repayments might reduce the amount a lender might offer you for a mortgage by about £3,000-4,000 if you earn £30,000—when somebody might be able to borrow about £90,000-£130,000 overall.

It wouldn’t be right to describe the student finance system as exactly like a graduate tax either. There are some points of the student finance system which are more like loans than taxes or a ‘graduate contribution’. Nobody forces you to take a student loan if you’re rich enough not to need one, and if you’re earning enough to make enough repayments you eventually won’t have to pay any more.