Student Lending in the UK: Assessing Risk in an Environment of Rising Consumer Debt:

Student Lending in the UK: Assessing Risk in an Environment of Rising Consumer Debt

Product Type: Market Research Report
Published by: Datamonitor
Published: December 2006
Product Code: R313-18855

Description

Introduction
Banks devote a considerable effort acquiring students while they are at university, by offering them cheap lines of credit in the hope that they will be profitable customers in the future. However, with increasing bankruptcies and Individual Voluntary Arrangements (IVAs) and a tougher economic environment in general, is lending to students really worth the risk?

Scope
Discusses the benefits and risks of lending to students.
Provides insight on what lenders should take into account when putting together their student portfolios.
Understand where the opportunities lie for UK lenders.
Incorporates primary interviews from industry experts and secondary data from a wide range of sources.
Highlights
While current accounts are the main acquisition focus of banks, once they have the student as a current account customer, their focus shifts to lending products. The propensity for students to accrue debt means that banks can often generate further product sales during or after graduation through the provision of credit cards and personal loans.

The vast majority of student debt is in the form of Government student loans, with the majority of the rest from overdrafts and other commercial lending. Based on the Student Experience Report 2005 and Ipsos MORI data in 2005, 77 per cent of students in debt have to repay a Government loan, 36 per cent an overdraft and 17 per cent a credit card.

At present the SLC is not allowed to share data on student loans with other lenders via credit reference agencies, meaning that prospective borrowers can have loans and repayment difficulties that are "hidden" from the lender. However, the DTI has agreed to hold a consultation on the removal of barriers to the sharing of non-consensual credit data.

Reasons to Purchase
Evaluate the risks of student lending and understand what steps your business can take to reduce its exposure.
Understand your competitors' strategies and what they are offering to students.
Assess the opportunities of student lending and learn how the market is changing.

Table of Contents

DATAMONITOR VIEW 1

CATALYST 1

SUMMARY 1

METHODOLOGY 1

ANALYSIS 2

Students are an important customer segment for banks 2

Students as a customer segment: banking on the future via cross-selling 2

Such a strategy is understandable given the increasing number of students in the UK 2

Lending is a large part of the student portfolio 3

Many banks offer a range of products, though the acquisition focus is on the current account 3

But lending is the more profitable product to sell 4

However, students are getting into greater and greater debt 5

The cost of attending university is becoming more expensive 5

As such, student debt has increased considerably over time 6

The majority of debt is in the form of Government loans, though overdrafts and credit cards are highly important too 6

Moreover, the average student beginning their course in 2006 will be at least £15,000 in debt by the time they finish 7

Given the more difficult economic environment and the increasing number of bankruptcies and IVAs, is student lending worth the risk? 8

Consumers are experiencing a more difficult economic time now 8

Such a situation is of worry to lenders who are already dealing with significant bad debt 8

This is more true than ever with the rising number of insolvencies by young people 9

While graduates are likely to earn more than non-graduates, they are not immune to economic difficulties 10

Because of significant student debt, there are suggestions that those under 30 are not big spenders on unsecured lending products 10

Moreover, even if students are better customers in the long-run, will they be loyal to their first current account provider? 11

Students continue to be viewed as a good investment, but banks are taking a number of precautions with student lending 12

In general, lenders are sharing more data in order to reduce bad debt 12

Lenders are pushing for Student Loans Company data to be shared 13

The Student Loans Company has become involved 13

The DTI is now holding a consultation over such "hidden data" 13

More importantly, lenders must be sure to lend responsibly 14

APPENDIX 15

Supplementary data 15

Definitions 16

Balances outstanding 16

CAGR 17

Consumer credit 17

Gross advances 17

Student 17

Further reading 17

European consumer credit reports 17

UK consumer credit reports 18

Forthcoming consumer credit briefings 18

Relevant links 18

Datamonitor's custom research capabilities 19

Ask the analyst 20

List of Tables

Table 1: The main banks compete for students by offering interest-free overdrafts, November 2006 4

Table 2: The number of students in the UK, 2000-2005 15

Table 3: Average student debt upon finishing a three-year university course in the UK, 2000-2006 15

Table 4: Percentage of student in debt by product, 2005 16

Table 5: Number of bankruptcies and IVAs, Q3 2005-Q3 2006 16

List of Figures

Figure 1: There are an increasing number of students in the UK, 2000/1-2004/5 3

Figure 2: Banks start by acquiring the student as a current account customer, followed by short and long-term cross-selling aims, 2006 5

Figure 3: Student debt has risen significantly since 2000, 2000-2006 6

Figure 4: The majority of student debt is in the form of Government loans, but overdrafts and credit cards are also important, 2005 7

Figure 5: Debt solutions have continued to become more popular in England and Wales, Q3 2005-Q3 2006 9

Figure 6: Datamonitor's core consulting capabilities 20

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