Are student loans a ponzi scheme?

I completed my A-levels 17 years ago back in 1997, the year before student loans came into existence. Heck I, like most of my friends, even had a grant to attend university. Yes, you read that correctly class of 2014, I was paid to attend which was ironic as attending my BA Management degree at the University of Hull was pretty low down on my list of priorities, coming far behind both playing pool and the Who Wants To Be A Millionaire pub quiz machine. We didn’t care, we weren’t paying for it and even back then I couldn’t see the value in a business degree.

Well now you are paying for it and paying big. The average UK student debt is now a staggering £44k and with the interest rate now at 5.5% the debt doubles, due to compound interest, every 13 years. And no you can’t go bankrupt to clear it. And yes it probably will affect your ability to buy a house or get a car loan seeing as you already have the equivalent of a sizeable mortgage.

Stop the madness (as Mr Wonderful aka Kevin O’leary says on the US version of Dragon’s Den, Shark Tank

You thought giving mortgages to people who couldn’t afford them was bad? At least they had some kind of collateral / income. We are lending to young people that have no assets and no money and lending huge sums which accrue interest. As Ian Cowie recently said in the Sunday Times:

[box] Encouraging young people with no jobs to run up debts is often equal to – and sometimes exceeding – what their parent’s generation borrowed to buy their first home is financial madness.[/box]

Unfortunately the madness – concentrating risk on individuals – doesn’t end there. People are investing in it through their pension funds. The non-profit (how ironic) Student Loans Company has been securitising student debt and pushing it onto the market in a way that would impress even the best snake oil salesman or crack dealer. Who wouldn’t want to invest in a fund called Thesis – it sounds such a wise investment even though the Government originally estimated that only (ONLY!) 28% of student loans would never be repaid. Now that figure is closer to 50%. Yes 1 in 2 (and you don’t need higher education to do that maths) students will NEVER be in a position to back their debt. The Government is losing 45p on every £1 it loans out. Yet investment funds keep buying the stuff.

So what of that ponzi scheme in the title? Let’s turn to Wikipedia for advice (as Alan Partridge says, Wikipedia has made education all but pointless!):

[box] A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.[/box]

I’m not sure how you can make a return to investors when almost 50% of loans are defaulting. Is the Government operating a ponzi scheme in the name of the SLC?

If university is about ROI from both a financial and a learning perspective then making money online yourself has the highest expected value. It’s totally possible for young people to start up an online business alongside their degrees and be making a small income within a couple of months and there’s no better way than starting your own ecommerce business. I run iPanorama Prints on the platform Shopify where I take orders for prints, mainly in the US, and have a US printer fulfil and ‘dropship’ for me – it takes a few hours a week and generates four figures a month and, as a location independent business, I can run it anywhere in the world.

Richard Patey