• The London Finance Journal

Future Earnings Agreements - Addressing the crisis of social mobility

Updated: Sep 11, 2020

This might be the first time you’re hearing of ‘Future Earnings Agreements’ (FEAs) – and you are not alone.

First, why are they needed?

There is more demand for workers with prestigious qualifications than ever before as jobs become increasingly complex – however, cost is an insurmountable barrier to these qualifications for most talent.

The courses that lead to the highest-earning outcomes often cost in excess of £30,000. Meanwhile, 75% of UK 20-30 year-olds have combined savings and access to finance of less than £7,500 (ONS).

Thus, the current financial system excludes the less wealthy majority from the education that leads to the best-paid careers, creating a catch 22 situation where the means to uplift income is only affordable to those who already have a high income. This is not only unjust; it is a monumental waste of our brightest talent.

Government student loans are capped at £11,222 for a masters degree and so do not cover the cost of these qualifications. Private debt finance should fill this gap, but it can’t because it is based on a person’s income history, which for young graduates is often low, despite high future earning potential. Banks have long left this market leaving a few private high cost loan companies, charging credit card levels of interest to compensate for the 1 in 10 they bankrupt and leaving many of the remainder burdened with debt for decades due to compounding interest.

The unsuitable nature of debt for student finance has created a significant market dislocation, with students who don’t already have wealth effectively locked out of “productive investment” into higher education. This is also a missed opportunity for lenders who do not invest in the large and profitable market segment - the postgraduate UK market is worth over £10bn per annum.

That’s where Future Earnings Agreements (FEAs) come in - a new form of student finance designed specifically for this market. This is fundamentally different from debt as the cost of the qualification is not required to be repaid with interest, instead the graduate shares a percent of their future earnings for a defined period i.e. there is no fixed amount to be repaid and no compounding with interest. Those graduates who benefit most from the degree and earn the most will repay the most up to a maximum cap, while those who earn less than expected and can afford less, repay less. This means that on average, investors in FEAs get their money back plus a little more.

For borrowers it means repayments are deferred until they earn a reasonable salary. As the total amount to repay is capped, if a graduate pays more than expected, the loan may be paid off earlier. On the other hand, if the individual pays less than expected, no extra repayments would need to be made, mitigating the risk of the burden of insurmountable debt for decades. FEAs do not have an interest rate, instead the amount to be repaid is linked directly to the amount of income earned.

Outcome-based finance is a crucial step to democratise access to opportunity and enable all talent to reach their career potential. FEAs address the UN Sustainable Development Goals (SDG) by reducing the poverty premium on education and reducing inequalities. Since the 17 goals of the UN are interconnected, dealing with one will necessitate tackling others. Most importantly, the UN Goals are the leading ESG (Environmental, Social, and Governance) Framework for companies, emphasizing on the need to serve the long-term goals of our society.

StepEx is currently the only provider of FEAs in the UK that is regulated by the UK’s Financial Conduct Authority (FCA).