May 26th, 2013


Student Loans - a partial correction

It was pointed out elsewhere that some of the assumptions I fed into my calculations on student loans in my last entry were wrong. In particular: although it's true that during study the interest charged on loans is RPI + 3.5%, on graduation it falls to RPI alone (i.e. around 3%, on average) until the threshold salary of £21K is reached, at which point it's RPI+1%, an amount that rises with salary until a maximum of RPI+3% (i.e. around 6%) is reached at £41,000 income. This isn't as bad as my scenario, which had a rate of RPI+3.5% (i.e. around 6.5%) throughout.

This of course has to be balanced against the incredibly optimistic assumptions I built into my example, namely that a) our putative student borrowed no more than £1,000 over three years to buy food, accommodation, books, heat, light, etc., and b) that our student was earning £46,000 within four years of graduation and £56,000 shortly thereafter.

If we're going to correct on one side of the line we ought to correct on the other, so let's try a slightly more realistic scenario. This time I will use the corrected interest rates, but I will also assume that our student borrowed £4,000 per annum to live on. This gives a total loan of £39,000. This is still modest - many students end up borrowing more like £50-60,000.

Rather than do the maths myself, I'll hand you over to the student loan repayment calculator. The calculator uses three different starting salaries, based on the salary trajectories of past graduates.

Graduate A: Starting salary £19,000, finishing salary £30,000. Less than half the initial loan will ever be repaid (let alone interest).

Graduate B: Starting salary £25,000, finishing salary £50,000. This loan could be repaid after 25 years - half a working lifetime - including £21,000 in interest payments.

Graduate C: Starting salary £30,000, finishing salary £80,000. This loan could be repaid in fifteen years, including about £12,000 in interest. Naturally, the richest people are the ones least penalized by the system. (Presumably those who are rich enough not to need the loans will not be obliged to pay interest at all.)

Given that many graduates go straight into unemployment or non-graduate jobs, these starting salaries still seem very optimistic to me. They also assume continuous employment, which ignores both the fragility of the job market and the fact that many graduates take time out from employment in order to have children - a "repayment holiday" during which interest on their debt will be steadily mounting at about 3% p.a. Overall, the situation is slightly better than I had thought, but not significantly so. I still see the vast majority of graduates failing to pay off their loans until they near retirement, if ever.