Carl Mortished: How the Fed weighed in on student loans

Once upon a time, universities existed for the good of the Church, religious scholarship and the glory of God. Back then, town and gown didn’t mix well; scholars behaved badly and so did townies, charging too much for food and rent.

Not that much has changed, you might think, but the medieval religious scholars had one big advantage over today’s undergraduates — the absolute support of mother Church and later, the Crown.

Today, the Almighty has been banished to the chapel — Mammon is installed at top table where he dines with the dons. Universities have become part of the modern economy; their purpose to educate and train young people to become efficient workers with a profitable sideline in conducting scientific research for businesses. The Crown (government) still supports the universities but the students must pay for their education. For most undergraduates, that means borrowing large sums over a very long term; a bit like taking out a mortgage on a home.

The sums borrowed (rising to more than £50,000 for an average graduate, according to the Institute of Fiscal Studies), the high rate of interest (6%), and the expectation that two-thirds will never fully repay their loan is fuelling a row. The Labour Party has promised to scrap tuition fees (a pledge that would cost the nation £60 billion, says the IFS) and the Government has promised to rethink.

The Prime Minister should talk to the New York Federal Reserve which last April published disturbing research that showed the impact which high levels of student debt is having on home ownership. America’s graduates owe $1.3 trillion (£920 billion) for their education and many are getting into trouble with loan repayments.

Serious delinquency rates are more than 11% — higher than credit card debt — and William Dudley, the New York Fed president is worried, not about a sub-prime type debt disaster, but about the long-term social and economic cost in the linkage between higher education and high levels of personal debt.

The disturbing news is that the Fed’s research shows that graduates with high levels of student debt are less likely at any age to be homeowners than those who left university with no debt. Though the research shows that graduates leave university with higher earning potential, that advantage is being severely eroded by the burden of debt.

The Fed’s president fears that exclusion from home ownership could have serious social and political consequences. “For a large share of households, housing equity is the principal form of wealth… the way we finance post-secondary education could also have important implications for the distribution of wealth.”

The late Lady Thatcher’s vision of Britain could be summed up as a nation of homeowners, the equity in granny’s suburban semi providing the seed capital for the prosperity of future generations. But how does a young graduate without a home-owning granny pay a deposit on a home, when his very meagre savings are being sucked into student loan repayments at a rate of 9% (on income above £21,000)?

The cost of higher education may soon become a dead weight on the British economy even without a solvency crisis. We can reasonably assume that a home ownership gap exists between debt-free university graduates and those who are repaying loans.