Controlling Loan Growth
I asked Mr Duncan Hames MP on November 30th:
Based on averages loans and interest rates how much do you estimate a graduate would have to pay a month when they reached an income of £21,000 a year just to cover the interest and the R.P.I. and thus stop the debt increasing?
The answer I received from Mr David Willets MP of 3rd February used figures based on fees of £6,000 fees and living costs of £4,000 for a 3 year degree, a low estimate for both fees and living costs ( see section 'total loan at graduation'), giving a debt of £35,000 increasing at RPI-X of 2.75%, again a low estimate, and much less than the average over last 30 years (see 'loan growth section') and below the current RPI-X rate. He puts the payment to stop this debt growing on these figures at graduation at £80 a month.
Figures Mr Willets MP gave for a £9,000 fee for a 3-year course gave £100/month payment to control loan growth.
These are the payments required just to stop the loan growing. A graduate would need to be earning around £31,500 and £34,300 respectively for penalty free payments from salary to cover this.
Upfront fee payment
I asked:
I believe it is proposed that there will be a penalty payment for any students who find themselves in a position to pay off their loan early. Will this apply to both the tuition fee and the maintenance loan? Students from very wealthy families who can afford the fees will presumably avoid this 'education penalty' by paying fees up front. Is this fair? Will it be possible for most families, who won't be able to afford the full sum, to pay the maximum they can afford up front and thus reduce their children's bondage and limit their future liability to the education penalty.
Mr Willets' reply
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Students are free to fund their own tuition charges if they so wish and are not obliged to take out the student loan. The government is committed to the progressive nature of the repayment system.
It is therefore important, that, for those that decide to finance their tuition charges via a student loan, people on the highest incomes after graduation are not able to unfairly buy themselves out of this progressive system by paying off their loans early. We will be consulting on potential early repayment mechanisms- similar to those paid by people who pre-pay their mortgages. Details will be announced in due course.
Mr Hames' MP reply
However penalties for those who are able to pay up front fees and do want to take out a government loan would be difficult to implement. Furthermore the fiscal advantage to doing this is both minimal and uncertain. The benefit gained by graduates paying up front will be the interest that other graduates have paid on their loan. Only graduates who have lifetime earnings in the top three deciles will pay this interest. It seems that the disadvantage-relative to a similar graduate who had paid fees up front- it is negligible compared to the lifetime benefit. Finally those who do pay up front lose the valuable insurance aspect of the student loan support system and could end up paying more for their education-in up front fees-than they would have done in loan repayments'
Contrary to Mr Hames MP I would expect the type of students in the position to pay fees up front are highly likely to be those with the highest prospective incomes, possibly through a variety of sources, and who are likely to have to pay back the loan plus the higher rate compound interest RPI-X plus 3%, and hence have a lot to gain by paying fees up front.
It is highly possible we will reach a position where someone on a social worker's salary will be paying a higher rate of 'tax' in the £ than someone from a wealthy family who ends up in investment banking. By paying the fees upfront the wealthiest parents can protect their children's future contribution to university education. This could not happen with a tax.
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Amongst the parents I have spoken to there is confusion about the situation regarding paying fees upfront, hence to try to clarify this I sent the following question to Mr Hames on May 22nd
Some people I have spoken to are under the impression that it will not be possible to pay the £9,000 fee up front once offered a place, but that the £9,000 fee is only available to students who take out the loan. These people are under the impression that the only fee payable upfront for a student, even one going through the normal UK admission process, will be the full overseas student fee.
Please clarify this for me as obviously if the £9,000 fee can be paid up front wealthier families will in fact pay less for their children's university education than is paid by a child from a poorer family, where both children achieve similar incomes which would have led to them paying back by interest or loan repayment more than £9,000 x the number of years of the course. If this is the case do you think it fair? Does this reflect your stated intent that payment for education will be by ability to pay?'
As yet I have received no reply.
Total Sum Paid Back
If we accept the life time ‘graduate premium’ from a university education is £100,000 net then this only averages to £2,000 premium a year spread over a 50 year working life. The loan repayment of 9p/£ equals £900 paid for every £10,000 earned above the £21,000 threshold, thus at a salary £41,000 it would be £1,800 a year. Obviously these figures are not accurate as the premium is not evenly spread but they do show how close the premium could be to the pay back.
If a particular degree gave no graduate premium then obviously for everything that graduate earned over £21,000 the 9p/£ repayments would make them worse off than if they had never done a degree. A high graduate premium more than makes up for the paybacks. From this we can deduce there is a point where the paybacks and graduate premium balance each other out.
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The figures produced by Price Waterhouse Cooper for Universities UK give graduate premiums for a variety of degrees are important here. Reminder below:
Arts | £35,000 |
Humanities | £51,000 |
Linguistics | £72,000 |
Agricultural Sciences | £82,000 |
These are before the 9p/£ repayment
As the size of graduate premium does not affect the total loan, payback threshold, nor 9p/£ payback rate, the point where the payback will outstrip the premium will obviously happen much more quickly with a lower premium.
In contrast to what you might think, the detail of the way the repayment system for loans works will not mean that those who earn less simply pay back less. On his money advice site Martin Lewis has attempted, with large reservations, to calculate lifetime paybacks from graduate starting salaries.
For a £9,000 fee, 3 year course, he gives for a starting salary in 2016 of £25,000 a £43,000 payback,
for £30,000 start salary a £73,000 payback,
for £35,000 a £103,000 payback,
for £40,000 a £124,000 payback,
for £45,000 a £108,000 payback , for £50,000 a £94,000 payback.
This demonstrates how quickly low to middle graduate premiums might be lost by modest earners. For full details of the difficulties of the calculations go to the web site.
Arts and Humanities graduates are certainly close to a point where premiums will equal payback. Arts and Humanities graduates, I believe, make up around 15% of graduates, a significant number of individuals, who may be worse off for having done a degree.
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The ONS figures show that graduate salaries peak later than non-graduate salaries, in your late forties and early fifties. In less well
paid careers loans would not be paid off early, for these lower earners the extension of payback time from 25 to 30 years will apply at the time they might achieve a small premium. The less financially valuable a degree is the more any financial 'gain' is lost. This is not progressive and penalises most those who make the smallest gains, probably the lowest paid.
This brings us to considering the claim that 'those who earn least will pay less' is not a deterrent to a university education. I would contend that those who end up on the lowest salaries are those most likely to be financially disadvantaged by their education. For every £1000 earned over £21,000 a degree holder will take home £90 less. To make up this shortfall against a non-degree holder, or someone who was not liable for fees, they must earn an additional a gross sum that covers 20% base tax plus the 9% to cover the gap, for loan repayment, around £126 more. Someone on a below average salary of say £25,000 would take home £360 less a year, and this would continue for the full span of the loan as the debt would only grow, and never be paid off. At these levels of income these sums are important. I would contend that intelligent people whose degrees do not automatically make them into high earners but would probably be employable anyway, are taking something of a financial gamble by going to university. The new government policy seems to believe that the only reason for education should be a good financial gain.
For prospective good students who are unsure of their final career destination this is now a deterrent.
Although this is being sold as a loan payback it has many features which make it more like a tax. Unlike a tax, though sadly, this system is neither universally applied nor progressive. Most of these loans will never be paid off and will be being paid back for at least 30 years.
There are many statements made about how most will never payback the loan. In fact what they will never pay back is not the initial tuition fee loan but the loan plus its compound interest. If RPI-X continues to outstrip salary growth, as in recent decades,
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loans may grow faster than the salaries they are being paid from, even before any additional real rate of interest is applied. Over the last 30years RPI-X has been at 5%, giving, I calculate, an RPI-X increase of around 5 fold, salaries are roughly 4 times higher than 30 years ago. Our poor graduate may be paying off larger sums from a salary inflating with time, but not relative to salaries in general, but unlike a mortgage, their debt may not be decreasing, and could even be increasing in real terms if RPI-X outstrips salary inflation.
The argument used to defend the loan policy, that those on low incomes pay less, is untrue. Those on low incomes or on incomes which rise steadily, not dramatically, may end up paying a great deal more than someone on a high starting salary because in the long term they pay off a much higher sum in interest. Middle earners will pay a very, very much higher proportion of their lifetime earnings than high earners
Early payback penalties
I asked Mr Hames:
Will it be possible for most families, who won't be able to afford the full sum, to pay the maximum they can afford up front, and thus reduce their children's bondage and limit their future liability to the education penalty'.
His reply in fact dealt with early repayment but was none the less informative.
The government will consult on early repayment mechanisms. These mechanisms would ensure that graduates on modest incomes who strive to pay off their loans early through regular repayments are not penalised. Suggestions include a 5% levy on additional payments each year over a specified amount (such as £1000 or £3000) or that those on higher incomes (over £60,000) pay a 5% levy on any additional payments.
The payback of £1000/year would come in at a salary just over £31,000.
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What makes the loan difficult to payback is its continual growth with interest; for someone who will eventually pay it all off anyway
the more of it that can be got rid of in the early years the better, because of compound interest. Someone with high earnings immediately after graduation collects less interest than someone with a steady salary growth, who eventually pays the loan off over its span. The amount a high earner pays back from salary is automatically higher than a more modest earner after graduation. The high earner will payback more without additional payments and associated penalties.
A very small number of 2011 graduates have gone into the city on over £46,000 plus bonuses, so this year could have paid back over £3,000 without penalty. In a few years these graduates may be on £200,000 and would be in a position to pay back the whole loan without penalty. This being the case it would be unfair to penalise a lower earning graduate paying it off from a windfall of some sort.
For any group of people who in the end payback the whole sum the ones who earn most, fastest, do best, having less interest to pay, and less in additional pay back penalties for the same size of payment. To be truly fair the threshold for penalties must be equal to the highest amount any graduate who graduated in the same year has been able to pay without penalty from their salary, thus penalties must become almost irrelevant shortly after graduation.
When considering 'Early payback penalties' surely one must also aim for parity of some sort between those who paid full fees and those who had a fee waiver, whether this is due to their parents financial position or their desirable 'A' level results. Everyone should be able to reduce their debt at graduation, without penalty, to that held by those with maximum grant and fee waiver, otherwise students are being penalised for not having been eligible for these initially. Remember some fee waiver students might be eligible for the fee waiver in the first place as a result of A levels gained through private education.
Those who can afford to pay fees up front themselves will avoid penalties all together, thus penalties can never be fair.
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