Student loan debt rose £12.6bn, or 17 per cent, to £86.2bn in the past year, as the first cohort of students to pay higher fees graduated.
Graduates who paid fees of up to £9,000 a year are estimated to have left university with an average of £44,000 of debt, compared with the average £16,200 of debt faced by those who graduated five years earlier.
The rise in student loan debt balanced out a fall in other household debt and leaves new graduates even more poorly placed than their predecessors when it comes to getting on to the housing ladder.
Household debt fell relative to household income in the first quarter of 2016 using a measure of debt that excludes student loans, according to analysis provided to the Financial Times by NatWest. But once student loan debt is included, debt remained constant relative to income.
About 70 per cent of students who left university last year are expected never to finish repaying their loans, according to modelling carried out by the Institute for Fiscal Studies. Instead they will have to make repayments for 30 years before then having the unpaid loan written off.
This is in stark contrast to earlier generations of students. Of those who graduated in 2002, 44 per cent had already paid off their loan within 13 years, according to new data from the Student Loans Company.
This raises serious concerns about the ability of the new generation of graduates to get a mortgage. “Affordability checks done by mortgage lenders look at the borrower’s free income, after deducting loan repayments,” said Sebastian Burnside, an economist at NatWest.
“Compared to previous generations of homebuyers, it will take longer for them to have the income necessary to fund the homes they want to buy,” he added.
Once graduates start earning more than £21,000, they are liable to make loan repayments worth 9 per cent of their salary above that threshold. But if the graduate does not finish repaying the loan within 30 years, the outstanding balance will be written off.
This means that — for the 70 per cent of new graduates not expected to finish repaying — the loan repayments act more like an additional tax on their income above £21,000, which will last until they reach their early 50s.
This additional burden will add to the barriers already facing young people trying to get on to the housing ladder.
The fraction of younger adults who own their own home has declined markedly over the past decade as rising house prices, falling real wages and tighter mortgage lending criteria since the financial crisis have conspired to make it harder for first-time buyers. In 2014-15, the latest year for which data are available, 37 per cent of 25-34 year olds owned their home, compared with 57 per cent 10 years earlier.
Those who do get on the housing ladder have higher levels of mortgage debt. On average, mortgages taken out in 2015 were worth £175,500, up from £126,000 10 years earlier, according to data from the Council for Mortgage Lenders.
In general, UK households have seen their incomes rise faster than their debts over the past year. But there has been a large increase in student loan debt that has offset reductions in debt elsewhere. New graduates face a much larger student loan debt than their predecessors did and this is likely to affect their ability to get a mortgage. “This is a relatively new issue; we are only just starting to see the effect of it . . . the mortgage market has to work out how to adapt to this challenge,” concluded Mr Burnside.
Letter in response to this report:
Graduates can’t get on to the ladder by themselves / From Sara Newell
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