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Don't Eat With Your Mouth Full

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Are Student Loans Really a Tax?
I've been doing a few back-of-envelope calculations, and they don't make pretty reading. As maths and I have an uneasy relationship, I'm happy to have my figures and assumptions corrected - I only hope they're wrong.

[ETA Some corrections were offered elsewhere: see following post for a discussion of these.]

Student fees at most English universities are £9,000 per annum. For a three-year degree, that adds up to £27,000.

For students starting now, the interest rate is 3.5% plus RPI. RPI varies a good deal, but if we look at it over the long term I think it's reasonable to take 3% as an average figure. So, for back-of-envelope purposes, the loan is charged at 6.5% compound interest.

Of course, the interest begins to accrue from the moment the first loan is taken out at the beginning of the first year of college, so by the time the three-year degree is finished, we can expect almost £2,000 worth of interest to be added to the loans themselves, making a total of £29,000.

This is a best case scenario, in which the student's living and accommodation costs are fully-funded by parents, bar work, etc. In reality, all but a very few students will need to supplement the fees loans with other loans to cover these costs. For most students, these extra loans will amount to many thousands of pounds, but to make the maths simpler let's say that our student has waalthy, generous parents and a fearsome taste for part-time work, and gets away with borrowing just £1,000. Total debt at the time of leaving uni with that precious 2.1? £30,000.

People who defend this system often justify it by pointing out that the money doesn't have to be paid back at once, but only when a graduate's income exceeds a certain amount (currently £21,000). After that, you pay 9% of your income over that sum. They don't often mention that interest will be mounting up throughout that period.

In the current climate I think it's reasonable to expect our student to take a couple of years to find a job that pays over £21,000. By that time the interest on the £30,000 will have bumped the amount up to £34,000. In other words, there will be around £2,000 per year (and rising) to pay in interest alone. How much more than £21,000 will our graduate need to earn just to service the interest - i.e. to stop the amount they owe from rising?

Well, £2000 is 9% of (about) £22,220. So, that's the amount above the threshold they will need to earn to keep up with the interest on their loan: requiring an actual salary of £43,220p.a. But of course, they won't earn that much immediately (quite possibly they'll never earn that much - the average salary in the UK is well under £30,000). To keep it optimistic, let's stay that our whizz-kid takes just another two years to get to this break-even point. By this time of course it is no longer the break-even point because meanwhile the loan has climbed to £38,000 and they'll actually need to be earning more like £46,000 to start paying it off. Never mind, let's be implausibly generous and give them a salary of £46,000 in their mid-twenties.

So, within four years of uni our lucky graduate is earning £46,000 (it took me till my late forties to earn that much) and is ready to start paying off the loan rather than just servicing the interest payments. Let's give them a successful career. Promotions follow, and soon they're earning £56,000. On that salary, they will be paying over £3,000 per year towards their loan, though only £900 of that will go towards paying off the capital (at least at first - the portion going on interest will of course decrease over time). At that rate, the loan would be paid off in another 23 years - around half a working lifetime.

That, of course, is pretty much the best conceivable case - a case in which virtually no loans for accommodation or living expenses are incurred during college, and in which a secure, very well paid job is obtained within a short time after graduation. For the vast majority of students, neither circumstance will apply. As far as I can see, anyone who is not in the top 10% of earners (i.e. more than £50,000p.a.) has effectively no chance of ever paying off their loan, at least through the government's preferred method of taking it out of earnings. They've very little chance of even servicing the interest on the debt. For them, the graduate loan scheme is actually a lifetime extra 9% income tax.

It's not actually a graduate tax, of course, because graduates like me (and the ones who introduced the scheme) don't have to pay it. It's really a punitive tax on the young.

That's like the situation here, except that it costs $55.000/year x four years to go to a good private school; probably half that to go to a good public school. There are discount rates which probably reduce the average rate by about 40%, so let's say $140,000 and $70,000, with most of that being debt. RIght now the debate is whether debt will be fixed at about 3% or move with the prime rate, in which case it could get much higher.

My senator, Elizabeth Warren, wants students to be able to borrow at the same rate as banks do. That won't happen. There is now more student loan debt in the US than credit card debt. A slow motion disaster, and endless debt peonage is already the situation here, and it's only going to get worse.

Everything I hear about Senator Warren makes me like her more.

The tripling of fees last year from £3,000 to £9,000 per annum got a lot of publicity here, as you may know. What got hardly any was the (more than) quadrupling of interest rates, from 1.5% to 6.5%. That's what's built peonage into the system.

Edited at 2013-05-25 12:28 pm (UTC)

I read an article somewhere, some while ago, pointing out how this punitive tax on the young is a major element in the current crippling of the ability of twenty-somethings to get onto the property ladder and thus spend money on furniture, decorating, and y'know, having a life/starting a family, which has traditionally been a significant element of the general spending that has kept the UK economy ticking over. Thus contributing to the ongoing stagnation that sees the economy bumping along with minimal growth at present.

Observing my kid sister and her husband's travails over the past decade (now both early 30's) this analysis made sense to me - and they're both in decent jobs (science teacher/something techie in a company that prints newspapers and magazines etc on comparable salary)

Agreed. I see it as a form of political control, as well as common-or-garden "I'm all right Jack"-ism from those who got all the benefits of the welfare state themselves (or came from too privileged a background to need them). People who are holding down extra jobs to keep up with loan repayments, let alone save for a house deposit, don't have the youthful energy to spare for protest.

It also means the government will never get back all this money the students are borrowing, so that an old-style investment in the future of our nation, like the tuition fees and maintenance grants we had has been converted into a bad debt, and a black hole of one at that.

Yes, indeed. For a government that piques itself on the principle of getting deficits down it's doubly shameful: neither doing it on its own account, nor instilling the principle of debt repayment into the nation's Bright Young Things.

Indeed! I suspect an awful lot of students will never pay off the debt or even a significant proportion of it.

I also worry about the effect on mature students. I did an OU degree in my early 40s when I retrained to teach adults. Is that going to be feasible for people in the same position now they have to take out student loans? Can you get a student loan at that stage in your life? Even if you go the OU route, courses cost £2500 per 60 point module when they used to cost £600-£700.

I suspect an awful lot of students will never pay off the debt or even a significant proportion of it.

I suspect (depending on the accuracy of my envelope sums) that a majority of students will go to their graves with more student loan debt than they had when they graduated. Either it was planned that way or it's monumentally incompetent.

I don't know what the situation is for mature students, but I doubt it's good. I do know that MA programmes have been dropping like flies for years now, for precisely the reasons you mention.

It is a punitive tax on the young. That's one reason why the online university/ opencourseware projects are gaining ground so rapidly.

Did you hear or hear of the California college that wrote an open letter of protest to Sandler at Harvard about his online justice class, saying its being made available to their students was unnecessary and wrong? It was a horrorshow, that letter: nowhere did it mention the needs of the students, or what they're facing monetarily. The letter exists in this pure universe where non-academic needs can be completely forgotten. In the name of the purity of live teacher-sudent interaction, or whatever. I felt a shade of Voltaire's rage at priests disallowing vaccination with cowpox, because of the purity of human skin, or whatever.

As the flood waters rise around the towers of academe...

I hadn't seen that letter, but I can't help thinking of Stanley Holloway's "Three Ha'Pence a Foot".

How is any graduate supposed to save for retirement? I can see an enormous number of elderly paupers in a few more decades.

Since they won't be eligible for a state pension until they're 68 they may not have much of a retirement anyway.