‘Student loans act as “gateway to more millennial debt”, but that might not be a bad thing’
Nearly half (47%) of university students and graduates in the UK, say that receiving a student loan has made them more comfortable with other forms of borrowing, while a third (39%) say the experience has made them more likely to borrow again, according to new research from credit reference agency Equifax. Between the ages of 18 and 40, people who attended university have on average double the amount of debt (£12,445) as those who didn’t attend university (£7,105), and that’s excluding the burden of a student loan.
The research comes as students receive final offers from universities by Thursday this week and look ahead to the weekend when they will have to make big decisions about where to go, and how to fund their higher education. Last month, major changes to student loan terms that are expected to increase the debt burden for young graduates across the UK were announced. These include a ten year increase to the repayment period for new entrants next year; a freeze to the income threshold at which graduates since 2012 repay, and changes to the way that threshold increases over time.
All this means that graduates going to university this year (and in every year since 2012) will have to repay around £400 more each year, and this number rises to £750 for those applying to university next year, who may also now be paying well into their 60s. Over a third (36%) of graduates aged 29-40 years who benefitted from much lower student fees, or none at all, believe that the changes are unfair, and will deter some people from attending university, with nearly half (47%) believing that these changes will create a generational divide between those paying and not paying the higher fees.
Equifax’s research indicates that students and university leavers are not just borrowing more, they are also more likely to be using a range of forms of credit. Nine in ten (86%) of those who attended university have some type of credit (excluding their student loan) compared to seven in ten (72%) of those who did not. Graduates are more likely to have a credit card, mortgage, overdraft, retail finance product (incl. BNPL), or secured loan, while those not attending university are more likely to have an unsecured loan.
Paula Roche, Managing Director of Consumer Solutions at Equifax UK said: “The research tells us that the experience of going to university and having a student loan makes people more likely to use other forms of credit in their 20s and 30s, more likely to have looked at their credit report, and more likely to be in tune with their finances overall. We know that graduates earn more, and are more likely to have a mortgage by the time they hit 40 years old4, but there are signs that this greater exposure to the credit market is also being driven by a greater familiarity with, or even desensitisation to, borrowing while at university.
“Whether it’s credit cards or car finance, using the credit system and building up a credit history is one of the best ways to build a positive credit score, which could be giving graduates a further advantage when applying for a mortgage in later life. Whilst taking out different forms of credit isn’t problematic when managed responsibly and repaid on time, it’s important for all young people to understand the different types of credit available, and to have a clear view of how their financial history may influence their ability to access them.”
Need for financial education
The study highlights a need for greater financial education during school age, with a quarter (23%) of respondents stating that they didn’t receive any support or education before they turned 18 years old to help with managing their finances after school. Concerningly this number was significantly higher for young women (27%) than for young men (19%), and much higher for those not attending university (28%) than for those that did (19%).
Levels of anxiety when managing money were concerningly high for all young people in the study regardless of background, but it does appear that student loans may be contributing to the problem. Two thirds (64%) of those paying off a student loan say managing their money causes them anxiety, compared to 58% among those who didn’t receive a loan and 57% among those not attending university.
Contributing to this anxiety may be a sense of understanding, or not, one’s financial history. One in five (21%) young adults say that they have never accessed their credit report, and this number rises to half (47%) of those currently in higher education. Almost half of those not doing so, confess it’s because they don’t know what a credit report is.
Paula Roche, continued, “Whether or not someone goes through higher education, 18-22 is a critical age, when young people will be polishing up their CVs, and getting ready for the world of work. It’s a little concerning therefore to see that a third of people in this age band have never checked their credit report, their financial CV, and for almost half of that group it’s because they’ve never heard of one. Education is absolutely imperative if younger generations are to feel empowered to manage their finances throughout early life stages.”
