The danger of commercial loans: What happens when student finance isn’t enough?

Alumni Leadership Board members Natasha Holcroft-Emmess and Jamil Tuki share concerns that students are being pushed towards commercial loans when student finance isn’t enough.

Financial hardship shouldn’t prevent anyone from going to university.

But concerns have been expressed over commercial loans being advertised to students, when government-backed loans don’t cover all of their costs.

You may have seen the news recently that Martin Lewis, founder of MoneySavingExpert.com, has written to UCAS asking the admissions service to stop advertising commercial loans to students.

His concern stems from the fact that the loans in question are offered on commercial terms, with interest rates up to 23.7%. This is in stark contrast to government-backed loans, which (for undergraduates on full-time courses) have a capped interest rate (currently 5.4%) and are written off if not repaid after a number of years.

(If you’re not sure what the difference is between student finance and commercial loans, or what interest rates are, or why they matter, we’ve put a quick guide at the end of this blog post.)

Why are students turning to commercial loans?

A major reason why students may be turning to commercial loans is because the level of support they receive from government loans is simply not enough to cover the cost of living while at university. In fact, 79% of students in the 2019 National Student Money Survey said they worry about making ends meet.

Few students are eligible to borrow the maximum maintenance loan of £8,944. Most can only borrow a proportion, and hope their parents are able and willing to contribute the rest needed. But even if they are, is £8,944 a year going to be enough for a student to live on these days?

The average yearly cost of living for households in the UK is £14,945, according to MoneySavingExpert.com, based on 2018 figures from the Office for National Statistics. Even if you deduct amounts for things like average annual costs to run a car (£1,726), for gas, water and electric (£1,493) and for phone and internet (£900), you are still left with an average yearly living cost of £10,826. That’s almost £2000 more than the maximum amount which only some students can borrow to live on.

When student finance leaves you with a significant shortfall, it’s especially difficult for families on low incomes. Maintenance grants used to be a lifeline for those most vulnerable to this, but they were scrapped in 2016, leaving poorer students worse off while studying and graduating with more debt than their better-off peers.

When we were at university, we both worried about running out of money towards the end of term. It’s not that we were living extravagant lifestyles, but living costs were high and the money just simply wasn’t enough. It’s not a matter of students eating more Pot Noodle or finding cheaper places to live – we’re talking about significant shortfalls, of several hundred or thousands of pounds.

The issue is the lack of access to sufficient funds, and it’s a real problem. It impedes people trying to access education.

What about postgraduate students?

Similar issues arise for those wanting to undertake postgraduate study. Masters students can borrow a maximum of £10,906 from the Student Loans Company. That’s for everything – tuition and living costs. But for many Masters courses, that amount is nowhere near enough.

Take, for example, the cost of a Masters in Management from Warwick Business School: £29,500. That’s just the cost of tuition – students will need to find more money (often significant amounts) to cover accommodation, food and travel.

This makes postgraduate study hopelessly out of reach for many – particularly those from low income backgrounds, who may be tempted to turn to commercial loans to cover the shortfall.

Is it all that bad?

It’s worth noting that living costs depend in part on where you live and lifestyle. Some scholarships and hardship funds are also available from universities.

But the number of scholarships is limited and competition for them is fierce. Often, students don’t know whether they’ll qualify for scholarships or other funding until after they have accepted their place. For students on full-time courses, doing paid work during their studies or vacations to supplement their funds isn’t always an option either.

While prospective students shouldn’t be put off applying to university, it is clear that the capped amounts which students can borrow under government-backed loans are leaving wide gaps in funding for many students. This can push students – particularly those from less advantaged backgrounds – towards commercial loans with far more onerous terms than student finance.

Recommendations for change:

• Increase the maximum amount students can borrow through student finance, so that it more accurately reflects the cost of living.
• Reintroduce maintenance grants, so what a student pays for university education reflects their financial situation – see recommendations in Sutton Trust report ‘Fairer Fees’.

 

Definitions: Student finance vs commercial debt

Student finance

• The government provides loans (student finance) through the Student Loans Company to help students pay tuition fees and living costs.
• Some of these, such as maintenance loans, require students to give evidence about ‘household income’ (for most, this will be their parents’ income). This can affect the amount students are entitled to borrow: the higher the household income, the less students can borrow.
• The amount students can borrow is capped. Currently, the maximum tuition fee loan for full-time undergraduates is £9,250 per year and the maximum students can borrow to cover living costs is £8,944 per year (for a full-time undergraduate living away from home, outside London).
• Only students whose family has a pre-tax household income of less than £25,000 will be able to apply for the maximum loan for living costs.

Commercial debt

• Commercial debt tends to refer to money borrowed from a for-profit lender, such as a bank or other loan-making company.
• Commercial loans tend to have a higher interest rate and may require you to start paying back the loan and any interest before you are earning over a certain threshold.

Interest & interest rates

• Interest is a charge commonly incurred when you borrow money.
• Interest rates are used to calculate the amount of the charge you incur when you borrow funds. The lower the interest rate, the less it costs to borrow money.

 

Natasha Holcroft-Emmess and Jamil Tuki are both members of the Alumni Leadership Board.