Focus: They'll pay for it

Being 20 may soon be the most stressful time of all as students settle debts and support an ageing population

It's summer in the year 2002. Congratulations: your degree certificate is still hot in your hands. Perhaps you have been a wise virgin and done the employers' round, perhaps you have just been lucky; either way, you land a job. As a new grad, you can expect, if you are male, a salary of pounds 14,820(that's today's figure plus three years' estimated inflation). Not bad money, and the reason, surely, why getting a degree is still such a good deal.

But don't rush out to spend the cheque: vultures will be hovering over your first few months' income. Two big policy changes were trailed this week - in Sir Ron Dearing's report on university funding, and in Social Security Secretary Harriet Harman's review of pensions, both of which are going to cut hefty chunks from 20-somethings' 21st-century salaries. For tomorrow's graduates, a significant slice of their starting salaries is going to be eaten up.

Some ten years ago higher education was free and pensions were something you started worrying about, if at all, when you were 40. Newly-minted graduates began life with, at worst, a small overdraft to pay off.

Within two years - if the central recommendation of the Dearing Committee is followed - maintenance grants could be abolished and students required to pay at least part of their tuition. Within five years the Government may be insisting that young earners either take part in a new state pensions scheme or save a minimum proportion of their salaries.

As a result, the early to mid-twenties will become a far more fraught period of life. Paradoxically, money worries may encourage a "Peter Pan" effect, as graduates linger in the comfortable (and cheaper) surrounds of their parents' homes, and delay setting up on their own. The decision on whether to have children of their own may get further delayed and the number of older mothers and fathers grow. Thinking even further ahead to their children's early adulthood, the burden on these new wage earners will be even greater: there will be even fewer taxpayers to pay for pensions.

"IT COULD be," says Ceridwen Roberts of the Family Policy Studies Centre, "that we will see child-rearing receding further into the thirties and a consequent decrease in the number of children." There might even be a bout of fraught inter-generational politics as debt-encumbered twenty- somethings fight against shelling out for the pensions and community care for their parents and grandparents.

At present, tuition for full-time students accepted on approved university degree courses is free. (Part-timers and those on non-standard and vocational courses may have to pay.) All students qualify for assistance with their "maintenance" - their spending on rent and food. Some get a grant assessed on the basis of their parents' income, though the grant's value is diminishing.

All students are eligible for a government-sponsored loan which is currently worth just over pounds 2,000 a year (for students in London). It is repayable from the April after graduation, provided the graduate is in a paying job. The Student Loans Company, the quango which administers the debt, has shown it is not afraid to set the bailiffs on defaulters. So far, the British tendency to honour the law has triumphed - the rate of default is tiny in comparison with, say, the US.

But grants and loans together don't provide most students with enough. They supplement by working and by borrowing - from banks, parents and friends. The shortfall for a first-year student in Manchester has been calculated at nearly pounds 2,000, and pounds 1,500 for London students living in a hall of residence.

The Dearing Committee is proposing that students should pay up to pounds 1,200 a year towards the cost of teaching them - actual costs range from around pounds 3,000 for arts subjects to well over pounds 7,000 for hard science and medicine. These extra costs would be met by another loans scheme. Dearing may also be recommending that the student grant should be wound up immediately and that access to loans for maintenance be means-tested - which would mean middle-class students would either rely on their parents' generosity or take out bank loans to tide them over.

What is certain is that graduate indebtedness will escalate. A survey of those graduating in the summer of 1996 showed that average debt was just over pounds 3,200 (debts usually increase after leaving university, as students buy suits and pay deposits on flats).

By 2002, that figure could more than triple. One unofficial estimate sees the class of 2002 emerging with average debts of around pounds 11,500 - made up of official loans for tuition and maintenance plus bank overdrafts and credit card debt. Simple interest on that could take between pounds 500 and pounds 900 a year out of post-tax income. However you look at it, that is a serious assault on a young person's lifestyle.

A survey by Barclays Bank earlier this year showed that only a third of the class of '96 professed themselves "worried" at their indebtedness. That figure is bound to grow. At present some 29 per cent of undergraduates report they have no "experience of debt" - but it turns out that nine out of 10 students do not consider the student loan to be a debt. They will.

Meanwhile, the review of pensions ordered by Ms Harman is likely to increase pressure on young people to start saving harder and earlier.

Where they are not eligible to join employers' occupational pension schemes, the pressure will be on to start private pension arrangements. Standard Life recommends a contribution rate of 7 per cent (pounds 1,000 out of that average graduate salary of pounds 14,000 plus) at the age of 25.

The Government's stated aim is to ensure that fewer people reach old age without having joined schemes which "top up" the basic state pension, which Labour is committed to keeping. Though Labour is also pledged to retain the state's earnings-related scheme, Serps, it wants to encourage people to make private arrangements.

The unstated objective is to get more pension without any additional state inputs, an ambition made all the more difficult by the growth in number of elderly people in the early twenty-first century. Ms Harman is right to say this growth is a lot less dramatic in the UK than it is in other European countries and Japan, and a lot less cataclysmic than the Tories pretended. But it will nonetheless push tax contributions upwards - another reason why those graduating in 2002 will have a harder time of it. Overall, according to the National Association of Pension Funds, the put-aside for pensions will need to at least double.

One option the Government is tiptoeing around is forcing people to save. Such a scheme operates in Chile and is being considered in New Zealand. It would endorse the view of the pension industry, as stated by the Association of British Insurers, that the best provision is early and often.

Pensions and student debt are not the only potential burdens on 20-somethings. The Tories toyed with the idea of compulsory insurance for community care, and Labour might return to it. Now that Geoff Mulgan, head of the think- tank Demos is in the Number 10 policy unit, might the Demos-inspired notion of compulsory divorce insurance see the light of day?

ONE certain prediction is that universities will have to do more by way of financial education. David Bloomfield, senior manager of NatWest student banking says: "For many students, the dividing line between managing debt and losing control lies in their ability to manage money well."

Something will have to give - possibly accommodation costs. Over a third of mortgage holders are under 30, but that figure might fall if it becomes more difficult for younger employees to think about buying their own homes.

According to Professor John Ermisch of Essex University, graduates with lower incomes are less likely to leave their parents' home, and less likely to start long-term relationships.

"Evidence shows that uncertainty is the key factoring inhibiting 'partnering'," he says. "Uncertainty may now grow. It's speculative, but higher indebtedness affects the rate at which 20-somethings form partnerships and have children."

If and when they do have children the young adults of the 21st-century will be required, during their lifetimes, to find the money to support the ageing of the generation now in its forties and fifties, along with an increasing number of older survivors. Baby-boomers will start retiring during the first decade of the new century. Many will not have voluntarily provided well for their old age and will expect to be provided with increasingly expensive social services.

The class of 2002 may come to bitterly resent the class of '68, which enjoyed completely free higher education and believed that the state would go on paying.