A life of debt begins here: Will student's money worries ever end?
Once they have graduated, the students of tomorrow face a bleak financial future: tuition fee repayments, a grim jobs market, outrageous house prices and ageing, needy parents. Will their money worries ever end? Amol Rajan does the sums
Sunday 20 March 2011
Next Saturday tens of thousands of young people will be taking part in a central London rally organised by the Trades Union Congress. The causes of the marchers' resentment are several, but chief among them are cuts to public services and, of particular interest to the younger protesters, the planned rise in university tuition fees to a possible £9,000 a year from 2012.But the thought of monthly tuition-fee repayments stretching into the distant future is not the only issue alarming teenagers.
The central political fact of our times is indebtedness. Recent figures reveal that our personal debt – which includes loan repayments, mortgages, credit cards and overdrafts – has risen to £1.45tn, more than the entire output of our economy last year. Yet that burden will be borne chiefly not by those who caused it, but by the young: it is they who must deal with obscene house prices and sustain a public realm shorn of resources. To see how this might affect them, let's focus hypothetically on just one of those young, angry people. We'll call him John Skint.
John and his generation don't know how they will afford many of the things that made their parents' lives comfortable. Rather, as they look from university to adulthood, middle age and beyond, mountains of debt and dependency loom before them. Acquiring a degree, saving up for a first home, getting married, having children, trying to raise them in a modestly comfortable house, part-financing k their university experiences, taking on increasing responsibility for their ageing parents, finally retiring but with a limited pension. It takes a leap of faith for anyone of John's generation to imagine these events, with all the expenditure involved, and feel reasonably sure that a regular job with a growing monthly salary can accommodate them.
"There is a feeling that this is a problem which won't go away any time soon," says Ed Howker, co-author of Jilted Generation. "A lot of those going to university, or thinking about going to university, don't want to start their adult lives in the red," he adds, "but frankly it's hard to see a way out of it. We hope that we'll get richer as we get old; but for a whole generation of young people, it's not clear that will happen. Everyone says don't worry, it's fine, we'll inherit from our parents. But we won't. Our parents aren't going to die," he says wryly. "Not any time soon, anyway."
Howker is right. And he is describing the position of young people who are far from the worst off. It is true, of course, that the poor will feel the pain of the coming austerity more acutely than those higher up the income scale. But even for the next generation of the middle classes – people like John Skint – the prospect for the next few decades looks potentially grim: ever-greater loans, unpredictable interest rates, and increasingly unaffordable necessities.
Mervyn King, the governor of the Bank of England, described the coming years as the biggest squeeze in incomes since the 1920s. Though personal debt as a proportion of net income has fallen slightly since the financial crisis, it is nearly 150 per cent now (double the figure of 25 years ago). This month, the education charity Credit Action reported that the average UK household debt is now £57,635 (including mortgage), and rising month after month. Noting that one in 10 UK adults is living permanently in overdraft, Credit Action added that young adults aged 20 to 29 were by far the most likely to be in this situation.
Is it possible, then, that John Skint will never fully recover from his debt-laden entry into the adult world?
He is confronted with an economic climate in which saving seems impossible. The Financial Services Authority says aggressive cuts in interest rates by the Bank of England amount to a £20bn transfer from savers to borrowers, with most of that going to those who borrowed 90 per cent or more of their property value – not, that is, to people like John. Little wonder that a new report for Scottish Widows shows that, on average, 40 per cent of those aged 45 to 54 – of whom there are 3.5 million in Britain – are now unable to save anything at all on top of their existing commitments.
The list of rising costs for our debt-laden young man, however, is endless. A culture of conspicuous consumption has created pressure to buy the unaffordable – which means paying on plastic. The average household owes around £8,000 in credit-card and loan repayments, and PricewaterhouseCoopers estimates that interest rates on those debts will rise by between 2 and 3 per cent in the next four years alone. That can be financed only by diverting a significant chunk of disposable income to repayments.
Meanwhile, we're getting older. And living longer, as Howker notes, doesn't just mean a longer wait until an inheritance; it also means caring for ever more elderly people. The Office for National Statistics estimates there to be around 11,800 centenarians in Britain now, with a k projected rise to 80,000 by 2033 and 626,900 by 2080. That's 53 times the present number. It is, in some ways, favourable that people are living longer. But we must be mindful of the burden those long lives will place on the young.
For, while both John and his parents can expect to live longer than ever, there is less money than ever to look after them in their dotage. Final-salary pension schemes are an endangered species, and plans to erase the requirement that they keep pace with the Retail Prices Index, announced last year, could cut payouts by up to 25 per cent (though the index-linking of state pensions might offer some respite).
What's more, for any sort of company pension, you need a job – and they're harder to come by. The Independent reported last year, shortly after the class of 2010 graduated, that as many as 70 university leavers are applying for each graduate job. And, according to the Higher Education Careers Services Unit, graduate unemployment is at its highest level for 17 years, with 8.9 per cent of graduates out of work in January last year (the most recent figures).
Even if one of these graduates does land a job, their chances of buying a home are slim. The ratio of average house price to average male full-time salary is currently 4.5; banks are also demanding bigger deposits and lending smaller amounts. "The boom in housing represents a vast transfer of wealth from young to old," says David Willetts, the Higher Education Minister and author of a seminal book, The Pinch. In effect, young people such as John Skint are forced to forgo affordable homes so their parents can continue to afford expensive ones. Understandably, as the government minister responsible for them, Willetts resists the idea that tuition fees will pitch an entire generation into long-term debt from which they might not recover. "We have to make the case that university education is still a worthwhile investment," he says. "But I understand why a lot of young people foresee many years of toil." As it stands – and as reported in The Independent on Sunday – the government's own projections anticipate that only one in four of those who take out tuition fee loans will pay them back in full.
That won't do much to assuage the ire of people such as Guy Aitchison, a PhD student at University College London and central figure in the student protest movement, who is helping to organise Saturday's demonstrations. "People leaving university now are already leaving with around £30,000 in debt, and that's before we even see the rise in tuition fees," he tells me. "How are they meant to repay that? And when, exactly? I know people who did Master's [degrees] at top universities but have now been doing low-paid temp jobs for years and years. I know someone who's been doing internships for a year. These people are very angry. Instead of bright futures, they're seeing a narrowing of opportunities, rising costs and endless debt. It's grim."
At the time of writing, every day 337 people are being declared insolvent or bankrupt; and 87 properties are being repossessed – one every 17 minutes. That is before the effects are felt of a spending squeeze Britain's central banker describes as the worst for eight decades.
There are hundreds of thousands of John Skints in Britain today, many of whom won't be marching in London on Saturday. His tale is speculative, obviously, but it warrants telling because a generation of young people – my generation – finds it all too plausible.
The seven ages of debt: How financial worries will dog the life of John Skint
1. John Graduates at 21: £27,000 in debt*
John Skint has a second-class degree and a first-class debt: £18,000 in tuition fees and a £9,000 student loan. He has to move back in with his parents while he fills out endless job applications. He has a dozen interviews; a few lead to internships, which are unpaid. He considers training to be a teacher, but can't afford the additional debt burden. Finally, he lands a job at a publishing house.
*All the following figures are given in today's prices
2. John, 32, and Chloe buy their first flat: £220,000 in debt
John and his girlfriend Chloe, who works in retail, want their first home to be bigger than a shoe box. So, after four years of paying a rent of £800 for a small, two-bed flat, they buy a modest two-bed house with no garden. Borrowing £25,000 from his parents for the deposit, they get a £170,000 mortgage, with monthly payments of £1,200. John is still paying back £150 a month to the Student Loans Company, and £230 a month for his tuition fees – 9 per cent of his £30,000 salary.
3. Marriage and children at 37: £240,000 in debt
John and Chloe spend £20,000 on their wedding, honeymoon and redecorating their house in preparation for a family. Where do they find the money for this splurge? Credit cards. His student-loan and tuition-fee repayments are steady. He hasn't paid back his parents for any of the £25,000 they put towards the deposit for his house. By the time his first child is born, he is earning £45,000. He and Chloe decide to have their second baby immediately. The cost of childcare is such that it makes little sense for Chloe to work, so she quits. Swiftly, John racks up another £10,000 of credit-card debt, used to fund daily essentials such as food. His tuition fees and student loan are still draining about £500 from him each month, and John now also puts £200 a month away for his pension. The Bank of England base interest rate has risen to 8 per cent; he has a monthly outgoing of £1,500 on mortgage interest alone. John considers a "good month" to be one where he has about £100 in disposable income. But spending even that means he feels guilty about not saving, and he knows his family costs are soon to grow.
4. Moving into a bigger house at 49: £300,000 in debt
John's sons are getting too big for the family home, so the Skints move to a larger house, with a bigger mortgage. His wife is back at work three days a week. A rise in his salary to £50,000 goes largely towards servicing his credit-card debts (he finished paying off his tuition fees and student loans in his mid-forties – as such, John is one of k the relatively few who have done so). He hasn't paid back a penny of the £25,000 his parents lent him – and now realises he may never do so. The Bank rate goes up to 9 per cent, so he now spends £1,800 a month on mortgage interest payments. But Chloe is back at work, earning £27,000, significantly easing the burden.
5. The young skints start college; John is 56: £330,000 in debt
John's sons go to a red-brick university, just as he did. They both take out student loans and will eventually have to pay back tuition fees of £12,000 a year. For now, John has to provide them with £1,000 each term – £3,000 a year. There is one year when they're both at university, which will cost him and Chloe £6,000. The death of John's father leaves his mother widowed. The family put her in a good nursing home. He and his three siblings have to meet the annual cost of £36,000, which means John spends £750 a month on his mother's care. The sale of his parents' home provides him with £15,000. He uses this to clear his £10,000 credit-card debt. He has moved to another publishing house, where he earns £55,000 a year. His sons graduate, but struggle to find jobs, so move back into the family home.
6. John is 67 but cannot afford to retire: £350,000 in debt
His sons move out, but John has minimal disposable income. Nevertheless, John is fortunate: before he is forced into a retirement he can't afford, the publishing house offers him a redundancy package of £15,000; he takes it. His mother still requires £750 a month for her care-home. His sons, meanwhile, aren't earning very much and what little they have they are saving in the hope of getting on the property ladder. Though they're now in their mid-twenties, John supplements their income: £50 each a week each – that's £400 a month. Not that either pays him rent. Ill health means that Chloe no longer works; John resorts to menial work in a supermarket, if only to save for his own retirement, because he won't get by on the joint state pension of £800 a month for he and Chloe and the meagre returns from his private pension. His only big asset is his home, but a depressed property market means it may fetch just £325,000. He has no idea how he'll account for his debt, and nothing much to pass on to his kids.
7. Will John, 75, and his wife die insolvent? £370,000 in debt
With his sons both married, John retires, exhausted. The sad death of his mother removes one financial burden, but the state and private pension he and his wife get don't cover their living costs. So he returns to plastic money, and takes out a new credit card at 18 per cent interest – the best deal available to a retiree in his seventies. Though his sons help, they have their own families to invest in – and they're already mired in debt too.
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