Total Debt at Graduation
My Question put to my MP Mr Duncan Hames on November 30th:
A student studying only a four year course could easily finish with £60,000 of debt made up of 4x £9,000 (Figures based on £6,000 a year fee cap are irrelevant. All universities raised their fees to the maximum cap last time and there is no logical reason why they will not again. Whether they bring in help for poorest students will have no bearing on the debt of the majority) this will be £36,000 plus living expenses overdraft of 4x £5,000=£20,000. This is not an extravagant living expense for a student based in London or other expensive city.
With compound interest and the loan increase by R.P.I. how many years will it be before a loan debt in the £60,000 range is more than the '£100,000 life time' extra graduate earnings?
Mr David Willets MP reply of 3rd February
Assuming a tuition charge of £6,000 and a living cost of £4,000 for 3 years (the most common course length) there would be a debt outstanding of £35,000 at the time the graduate was due to start repayment.
If tuition charge was £9,000 a year there would be a debt outstanding of £46,000 at the time the graduate was due to start repayment.
Mr Willets did not follow this through to the £100,000.
Reply from Mr Duncan Hames of 26th January:
The answer to this question is dependent on the career of the graduate and the varying rates of RPI and the interest rates that may be applicable. The DBIS are all performed in net present value (NPV) As is shown in the 'table below'
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graduates who do not end up in the top life time earning deciles are estimated to not pay off the full value of their loans'
No such table was attached, I have written to point this out to Mr Hames.
As neither Mr Hames nor Mr Willets gave any real answer to my question as to when the debt would equal the gain I have calculated these figures myself.
I arrive at a loan each year of £9,000 fees + £6,500 living loan (splitting the difference between London and outside London). I am unimpressed with David Willets suggestion of a living cost of £4,000 a year in 2012 in his reply to me and would like to see his figures for this. Are there some imminent deflationary pressures on the horizon the rest of us are as yet unaware of?
A total loan of £15,500 a year for students, for whom this degree of maintenance loan is available, the rest I assume will also have overdrafts to pay back as well. Below I list how this rises with a real rate of interest of 3%, which is what will be applied to all loans by the government during university (letter to me from Duncan Hames, 26 January 2011).
Figures were given to me for a 3-years university course, many students do a 4-year course and the professions are a great deal longer, therefore I have considered what happens over 4 years. A significant number of courses at English universities are longer than 3years. I have tried to find an average figure for length of first degree but so far have been unsuccessful. ii
It is not clear how or if the government took into account the varying length of degree courses when they were creating the fees policy.
To get the total value of debt at graduation, I have used the 3% compound interest currently suggested (further comment on this in my section on position of current university applicants for 2012).
I have used these figures to make the table following.
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Year | Loan | Total carried forward | Interest 3% on total | Debt at end of year |
1 | £15,500 | 0 | £476 | £15,976 |
2 | £15,500 | £31,465 | £943 | £32,409 |
3 | £15,500 | £47,908 | £1437 | £49,345 end 3 yr course |
4 | £15,500 | £64,845 | £1,945 | £66,790 end 4yr course |
Courses of 5 years plus are therefore coming very close to the £90,000 “net net” average graduate premium.
Subsequent loan growth
After graduation the loan grows by RPI-X plus an additional sliding scale of interest capped when salary £40,000.
It is worth bearing in mind that RPI-X has in recent years grown faster than average earnings rate. In essence, an unpaid loan has capacity to grow in real terms, so that the figures in the table above are likely to underestimate the real value of the debt after several years.
For some graduates who do not reach the payback threshold quickly, any for instance doing postgraduate qualifications, the premium may be outstripped by the loan even before they begin to pay it back. The new system will introduce for the first time an interest above RPI-X after the threshold is reached which will keep the loan growing during payback.
My research has shown RPI-X to have averaged at just below 5% during the 33 years since 1978. I am looking over 30 years as this is the predicted period of the loan, so only a long-term average can give any guide to this percentage. In answers given to me a significantly lower RPI-X estimate of 2.75% was used, lower than the current rate.
Size of loan compared to graduate premium
Loan growth in real terms to wages is not possible to predict as
RPI-X/salary rise in the future is an unknown ratio. What is, however, obvious is that the debt at graduation is so great as to be the real deciding factor as to when the premium is lost, which may even be before graduation. The RPI-X and sliding interest scale just 'compound' this.
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From the data being provided, it is impossible to make reliable estimates for how far the loan debt of a degree erodes the graduate premium. However, from the table above and the material in the previous section, it is clear that under the new system the cost could easily be the greater part of the asserted average premium. The balance of advantage in doing a degree has therefore been very significantly altered, to the point that for particular subjects and longer courses doing a degree becomes a clear financial gamble. This is explored further in later sections.
i My figures are averages and approximations and are more to give a sense of the sums involved than accurate figures. I feel the precedent for this amount of laxity is set by the figure of £100,000 the government used for graduate gain, where degree holders and the next tranche of population down with at least 2 A levels was used as a 'like for like' sample. As the £100,000 is the figure they have used to justify the debt it must also be my starting point
I assume, as appears to be the case, the majority of universities will charge £9,000 fees. We must then add living costs. My estimates are taken from 2010 figures and with inflation of fuel and food prices these are likely to be considerably lower than will be the case by 2012. My figures below are taken from NUS and individual university web sites and represent the middle of the range.
Average accommodation charge from 2010 figures £100/ week
Food £50/ week
Gas and electricity £15/week
Travel £10/week
Clothes £13/week
Toiletries, cleaning materials £10/week
This takes us to a figure very close to £200/week living costs.
Please note I have not included any budget for entertainment in
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this figure
Most universities run around a 30 week year, though most students have to cover at least 36 weeks of accommodation to cover costs over holidays. In the private sector it is now often demanded they cover 10 or even 11 months overlapping with their summer holidays.
Thus I will calculate maintenance costs at 30 x £200 plus 10 x £100 = £6,000 plus £1,000 =£7,000. Plus £400 for books and stationery total = £7400.
Even with summer jobs and parental support most students will require maximum loan when eligible, for their maintenance. In London for 2012 this will be £7,675, outside London £5,500.
ii. I wrote to the Department of Business, innovation and Skills to request this, the answer I received on July 7th was 'The Department for Business Innovation and Skills does not hold this information. May I suggest you contact the Higher Education Statistics Agency (HESA) www.hesa.co.uk.' I will do this, also requesting the numbers for each length of course, to see what proportion of students do a 3 year course and so I can calculate the average course length myself, if necessary.
Endnotes to Section 2
i My figures are averages and approximations and are more to give a sense of the sums involved than accurate figures. I feel the precedent for this amount of laxity is set by the figure of £100,000 the government used for graduate gain, where degree holders and the next tranche of population down with at least 2 A levels was used as a 'like for like' sample. As the £100,000 is the figure they have used to justify the debt it must also be my starting point
I assume, as appears to be the case, the majority of universities will charge £9,000 fees. We must then add living costs. My estimates are taken from 2010 figures and with inflation of fuel and food prices these are likely to be considerably lower than will be the case by 2012. My figures below are taken from NUS and individual university web sites and represent the middle of the range.
Average accommodation charge from 2010 figures £100/ week
Food £50/ week
Gas and electricity £15/week
Travel £10/week
Clothes £13/week
Toiletries, cleaning materials £10/week
This takes us to a figure very close to £200/week living costs.
Please note I have not included any budget for entertainment in
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this figure
Most universities run around a 30 week year, though most students have to cover at least 36 weeks of accommodation to cover costs over holidays. In the private sector it is now often demanded they cover 10 or even 11 months overlapping with their summer holidays.
Thus I will calculate maintenance costs at 30 x £200 plus 10 x £100 = £6,000 plus £1,000 =£7,000. Plus £400 for books and stationery total = £7400.
Even with summer jobs and parental support most students will require maximum loan when eligible, for their maintenance. In London for 2012 this will be £7,675, outside London £5,500.
ii. I wrote to the Department of Business, innovation and Skills to request this, the answer I received on July 7th was 'The Department for Business Innovation and Skills does not hold this information. May I suggest you contact the Higher Education Statistics Agency (HESA) www.hesa.co.uk.' I will do this, also requesting the numbers for each length of course, to see what proportion of students do a 3 year course and so I can calculate the average course length myself, if necessary.
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