Julian Knight: The next debt-laden generation can forget about owning their own homes
Students will graduate owing colossal amounts of money, which they will be paying off well into their thirties
Sunday 12 December 2010
Twenty-seven thousand pounds for a three-year university course; well done, Nick Clegg et al; Britain's public universities are among the most expensive in the world.
And you can bet that when the new cap on fees comes in, all universities will miraculously rise to the new higher charge rate, whether it is Oxford, Cambridge or Middlesex. Fees of £9,000 a year will be the norm. Mediocrity in the university sector will be rewarded as never before and people from a similar background to mine – working class and lone parent – will be asking whether or not they dare to take the risk of university. Whereas for me at age 18 – sad to say a whole two decades ago now, with the grey hair to prove it – university represented a way out and up; now it's a route to years of indebtedness.
And, yes, I do know that the Lib Dems say they have secured a better deal for people from low income households, but how long will it last? The record of successive governments over university funding has been gradually to shift the cost on to students, promise some relief to the hard-up but then erode this help once the dust has settled.
But beyond the arguments of the rights and wrongs, I wonder how much thought has been given to the impact of loading so much debt on to people post-university. The approach seems to be pretty sanguine and the hoary old figure that graduates earn the best part of quarter of a million more than non-graduates over their careers is trotted out by this and the last government. Sure, college debt is part of the furniture in the US and, like there, I expect the birth of the fully fledged college fund to come into play, particularly now we are set to have junior individual savings accounts. But this isn't the US; despite the recession, per head of population, they are some 30 to 40 per cent wealthier than we are. What's more, look at the earnings of everyone outside of the underclass in the US and the income gap between us and them is even wider. The US has a more dynamic economy than the UK's, capable of substantial wealth creation. In short, I'd much rather be an American graduate with 80 grand's worth of debt than a British one with 40.
As for the idea that graduates earn so much more, yes, sure for my generation that's true in part – and that is what the Government's figures are based on – but for this generation I seriously doubt it. There are just so many graduates that there aren't enough decent paid jobs to go round. The £21,000-a-year earnings figure when student debt repayment will kick in is very deliberate as it's just below the national average salary. In a few years' time, you will find tens if not hundreds of thousands of graduates earning just over this amount making their debt repayments – equivalent to 9 per cent of salary – and as a result being far worse off than non-graduates.
Then there is home ownership. OK, I don't buy into the "you must own your own home to be a full part of society" malarkey; however, the past 30 years of property boom and bust have made millions richer than they could ever have realistically hoped to be. Without the bank of mum and dad, how can someone saddled with this scale of tuition debt ever afford to buy?
Spotting this last-minute iceberg on the day of the tuition fee debate, Vince Cable got a written assurance from the Council of Mortgage Lenders that saddling millions with tens of thousands of debt won't make a blind bit of difference to their lending decisions. The return letter from the CML is a masterclass in obfuscation; Cable gets his assurance at the start of the letter, but at the end the CML suggests that it probably will make a difference after all. I can't blame it; the same Vince Cable has been chiding it over responsible lending but then wants lenders to ignore a whopping great big debt. Sure, at present tuition fees aren't included in an individual's credit rating but that is semantics. Because repayments come out of salary at source, this automatically reduces the amount someone is able to borrow – as it should.
What's more, because debts will be bigger in future, it means they will last longer, so this hamstringing of people's ability to buy a property will carry on into their thirties and perhaps even their forties. That's just one of the realities of the new lifetime of debt which is now being brought about.
Iceland doesn't deserve the praise it's been getting for sorting out its mess
When the financial crisis was in full swing there used to be a joke going around. What's the difference between Iceland and Ireland? Answer: One letter and about six months. Commentators on Ireland's travails keep citing the example of Iceland as a country sorting out its mess in double quick time. It's true that economic growth has turned around in Iceland. The Icelandic government's budget deficit is proportionally half of the UK's and it will soon be in surplus. Exports are doing well off the back of a devalued currency. The theory goes that Ireland should take the opiate of inflation and currency devaluation, leaving the euro as a consequence.
Iceland's President, Olafur Grimsson, said that the key decision was to allow the banks to fail. "These were private banks and we didn't pump money into them in order to keep them going; the state should not shoulder the responsibility." What Mr Grimsson didn't say is that it was foreigners – largely the Dutch and us – who were left with the debt when his country let the banks fail. I think of Iceland like an individual who maxed out their credit, signed their home over to their spouse and rushed down to the bankruptcy court. Although the lenders were foolhardy, there is a moral responsibility to pay back what you owe, if you're an individual or a country.
If it wasn't for the fact that Iceland is an insignificant country with a population smaller than Hull, it would not have been allowed to get away with what it has. And it is more than a little galling to hear the International Monetary Fund praise Iceland for keeping its Nordic social welfare model alive when we are currently cutting our quite limited welfare state. Get this, for instance: in Iceland, if you lose your job, you will receive virtually full pay from the state for the first six months.
Instead of pointing to Iceland as the way to go, commentators should be supporting the Irish for trying to do the decent, honourable thing. They have been a serious player and want to be so again. Let's hope in the long run their more painful approach will be rewarded. There is a hell of lot more difference between Ireland and Iceland now.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
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