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  • FIRST POST
    • MSE Rosie
    • By MSE Rosie 14th Jul 17, 6:16 PM
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    MSE Rosie
    Guide discussion: Should I repay my post-2012 student loan?
    • #1
    • 14th Jul 17, 6:16 PM
    Guide discussion: Should I repay my post-2012 student loan? 14th Jul 17 at 6:16 PM
    This is the discussion area for the


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Page 1
    • One-Eye
    • By One-Eye 17th Jul 17, 1:19 PM
    • 38,358 Posts
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    One-Eye
    • #2
    • 17th Jul 17, 1:19 PM
    • #2
    • 17th Jul 17, 1:19 PM
    It is a tax with very regressive features to look after the ultra rich.

    eg. Two students graduate with loans of £50,000. One takes a job with a salary of £45,000 and ends up paying about £150,000. The other takes a job with a salary of £100,000 and decides to wipe out the loan over 3 years and ends up paying less than £55,000.

    The only good point about the current system is that graduates who move abroad can be pursued for payment as it is set up as a contract.

    The labour party under Miliband/Balls totally failed to understand the Student Loans system by proposing to reduce fees to £6,000/year without realising this would only benefit the richest 50% of graduates - the poorer 50% would pay exactly the same over 30 years. Doubling tuition fees and increasing the interest rates only hits the wealthiest, so I am surprised that Corbyn/McDonnell haven't gone for this rather than the very expensive, possibly unafordable option of promising to abolish tuition fees and "think about" clearing historic debts.
    • pjala
    • By pjala 18th Jul 17, 6:23 PM
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    pjala
    • #3
    • 18th Jul 17, 6:23 PM
    • #3
    • 18th Jul 17, 6:23 PM
    In Martins q&a it mentions the self employed need to declare interest earned on savings so that 9% of this is also paid to the SLC. But, is this also true for ISA interest? If so, then graduates will be the only sector of the population who pay a "tax" on ISA savings. What about the LISA? But to be honest, even if not, then a 9% tax on all savings interest when others are paying nothing is ridiculous.

    This, for me, adds weight to the idea that student loans are virtually separate to the normal financial system obeyed by paye and business - i.e. tax - and it is highly regressive taxation. If it is a tax where the rich pay more, then we have a TAX system that does that. I am thinking it really needs to be properly addressed, and mistakes learned from this, without causing untold damage to all our future scientists, doctors, academics, etc. etc. Plus undermining the tax system in their minds.
    Last edited by pjala; 18-07-2017 at 6:27 PM. Reason: minor corrections
    • gloucesteroldspot
    • By gloucesteroldspot 19th Jul 17, 10:16 AM
    • 52 Posts
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    gloucesteroldspot
    • #4
    • 19th Jul 17, 10:16 AM
    The problems of student loans
    • #4
    • 19th Jul 17, 10:16 AM
    The long and short of it all is that it's a graduate tax, and that's fair enough if it is transparent and fairly and properly administered.

    However, it was decided to set up a monstrous bureaucracy which is none of these things. Most importantly it is unaccountable. Complaints are not properly handled and there is no way of challenging its decisions and actions. To my mind either the whole business of repayments should be handled by the Inland Revenue service, which would also presumably have the benefit of reducing costs substantially, or the Student Loan Company should become regulated by the FSA, like all other financial services of any size. At present the only way of getting any redress is to appeal to your MP, and we all know what a waste of time that is.
    • koru
    • By koru 19th Jul 17, 10:51 AM
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    koru
    • #5
    • 19th Jul 17, 10:51 AM
    • #5
    • 19th Jul 17, 10:51 AM
    One further point to add is that the length of the degree course influences the chance that the student will repay the loan in full. All other things being equal, students on 4 year degree courses will have loans 33% bigger than those on 3 year courses. A student taking the full maintenance loan could have a loan of £68k at the end of their course (plus 4 years of interest).

    This will also mean they enter the job market a year older than those on 3 year courses, so the number of years til the loan is written off is one less. [Deleted, as Ed 1 has pointed out I'm wrong. The wider point stands, however.]

    However, I'm guessing 4 year courses tend to lead to higher paid jobs, so perhaps this means loan repayments will be bigger.
    Last edited by koru; 21-07-2017 at 11:11 AM.
    koru
    • xJonny
    • By xJonny 19th Jul 17, 11:13 AM
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    xJonny
    • #6
    • 19th Jul 17, 11:13 AM
    • #6
    • 19th Jul 17, 11:13 AM
    It is a tax with very regressive features to look after the ultra rich.

    eg. Two students graduate with loans of £50,000. One takes a job with a salary of £45,000 and ends up paying about £150,000. The other takes a job with a salary of £100,000 and decides to wipe out the loan over 3 years and ends up paying less than £55,000.
    Originally posted by One-Eye
    I'm not entirely convinced by this argument. In reality, that 45k starting salary is probably itself earned by the top 1% and 20k-30k likely encompasses the vast majority of graduate level starting salaries. Moderately successful graduates are more likely to be in this dilemma of being unsure if overpaying will be beneficial, as Martin writes, and hence be paying close to max, ultimately actually paying their loan off at these headline interest rates.

    Conversely, think about those who go to university to study a "economically useless" degree with no career benefit, or who just party at university and get a bad degree, or even those who just struggle to find a good graduate level job and do a lower paid retail/admin job for example. Aren't there likely to be more of these than graduates who have a starting salary of 100k, who by your reasoning borrow 50k for 55k, pay it back almost straight away, and effectively have almost the same impact on the system as if they, as "ultra rich", did not take out a student loan and paid the 50k outright (which would actually be more sensible) ?
    • koru
    • By koru 19th Jul 17, 11:38 AM
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    koru
    • #7
    • 19th Jul 17, 11:38 AM
    • #7
    • 19th Jul 17, 11:38 AM
    What might be helpful is if MSE did an analysis to show how RPI +3% is likely to compare with alternative investments, over the 30 year life of the loan. If you have cash that you could use to pay off (or avoid taking out) a student loan, you can either "invest it" to reduce the interest on your student loan or invest it in, say, savings or equities (until such time as you "invest it" as a house deposit or, say, buying a car without a car loan).

    I think there's a good chance the 6.1% rate will be reduced before it hits, either because the Tories change it for political reasons, or because Labour gets in. But if it does go ahead then it is much higher than current savings rates and even than yields from most equities. But this is unusual, due to a surge in inflation caused mainly by the fall in the value of the pound, post referendum. Normally, higher inflation would be matched by higher interest rates on savings

    The student loan lasts for 30 years, so over the long term how does RPI compare with (a) the best buy 3 year savings rate and (b) the total return from equities?

    Actually, you can get a good indication of the answer from the Barclays Equity Gilt Study. (Discussed here: http://monevator.com/uk-historical-asset-class-returns/) Over the long term, equities (FTSE ALL Share index) have beaten inflation by an average of 5% per year, though the last 10 years this has been lower, at 2.3% pa. Barclays use RPI for inflation, so this matches the student loan measure of inflation.

    Therefore, investing spare cash in a FTSE tracker (in an ISA, to avoid tax), rather than using it to pay off (or avoid taking) a post 2012 student loan is likely to give a higher long term return than the worst case student loan interest, unless you think the last 10 years are the new norm for equity returns.

    If you do this investment in a LISA, you also get an extra 25% one-off boost to your returns.

    On the face of it, that study shows cash savings have underperformed inflation by 1.1% over the last 10 years, but longer term they beat RPI by around 1%. However, I understand Barclays use the "bog-standard" savings rate from Halifax or Nationwide. By shopping around for the best buys, you can usually beat these rates by 1 to 2%, so I would say that over the long term savings should earn RPI +2% to 3%. Again, you can boost this with a LISA. So, investing in a savings account should roughly match the worst case student loan interest, though of course as Martin points out the actual rate may be lower than RPI +3% and it may well end up being written off.
    Last edited by koru; 19-07-2017 at 11:50 AM.
    koru
    • Ed-1
    • By Ed-1 19th Jul 17, 11:58 AM
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    Ed-1
    • #8
    • 19th Jul 17, 11:58 AM
    • #8
    • 19th Jul 17, 11:58 AM
    This will also mean they enter the job market a year older than those on 3 year courses, so the number of years til the loan is written off is one less.
    Originally posted by koru
    No it's not. The loans for any given course enter repayment on 6th April after the student leaves the course. The loans for that course are cancelled on the 30th anniversary of the loan entering repayment.

    http://www.legislation.gov.uk/uksi/2012/1309/regulation/7/made

    I think there's a good chance the 6.1% rate will be reduced before it hits, either because the Tories change it for political reasons, or because Labour gets in. But if it does go ahead then it is much higher than current savings rates and even than yields from most equities. But this is unusual, due to a surge in inflation caused mainly by the fall in the value of the pound, post referendum. Normally, higher inflation would be matched by higher interest rates on savings
    Originally posted by koru
    If the DfE are to change the formula for setting interest rates on post-2012 student loans this September they've got until tomorrow to change the law so it's highly unlikely that it will be changed this year. Any change would require the current regulations to be amended and the statutory instrument would have to be laid before the summer recess on 20th July for it to take effect in September.

    Under the current regulations the only alternative to setting interest on post-2012 loans using the RPI + 0-3% formula is to not set a rate at all. The law states: “If the Authority determines that post-2012 loans will bear interest…”

    http://www.legislation.gov.uk/uksi/2012/1309/regulation/10/made

    The rate on post-2012 student loans has already been higher than the scheduled 6.1% for September. It was 6.6% in 2012/13 and 6.3% the following year but the accumulated debt it was levied on was of course lower then due to those being the first two years of the post-2012 system and maintenance grants reducing the total debt accessible.

    It’s postgraduate loans where the biggest difference for most would be felt from a change to the RPI + 3% formula as this would benefit lower earners as well as higher earners due to the smaller loan balance.

    http://www.legislation.gov.uk/uksi/2016/606/regulation/31/made
    • ccon
    • By ccon 19th Jul 17, 4:29 PM
    • 3 Posts
    • 1 Thanks
    ccon
    • #9
    • 19th Jul 17, 4:29 PM
    Student loan repayments after retirement
    • #9
    • 19th Jul 17, 4:29 PM
    I am 48 and starting full time uni this year.
    I will be about 52 when I finish as I will do a sandwhich year.
    Will I continue to pay back the loan after I retire ?
    Thanks to anyone who knows
    • Ed-1
    • By Ed-1 19th Jul 17, 5:01 PM
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    Ed-1
    I am 48 and starting full time uni this year.
    I will be about 52 when I finish as I will do a sandwhich year.
    Will I continue to pay back the loan after I retire ?
    Thanks to anyone who knows
    Originally posted by ccon
    You only pay back 9% of what you earn over the threshold. If you retire you don't earn over the threshold so do't repay.

    Pension income is exempt.
    • gloucesteroldspot
    • By gloucesteroldspot 19th Jul 17, 5:30 PM
    • 52 Posts
    • 49 Thanks
    gloucesteroldspot
    One of the things that has shocked me about my daughter's student loan is that the interest is charged monthly and then of course compounded. This means it spirals upward very fast. I don't know about anybody else but my ISAs don't work like that ( I wish they did!). I certainly didn't clock this when looking into the loan originally. I wonder if this is not a case of mis-selling? Just try asking the SLC what the real AER is.
    • silvercar
    • By silvercar 19th Jul 17, 6:16 PM
    • 35,891 Posts
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    silvercar
    The argument against paying it all of now that is used is that only a small percentage of people will clear their loan in full, but what should be being compared is paying it off now vs the total amount that would be paid over the 30 years otherwise. Obviously adjusting for inflation, but even if you won't pay it all off due to high interest charges, if you would otherwise pay more than the amount you would pay to clear it now it is still worth doing. More people would save money by paying it early than the number that would clear the debt in full anyway.
    • Ed-1
    • By Ed-1 19th Jul 17, 6:26 PM
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    Ed-1
    One of the things that has shocked me about my daughter's student loan is that the interest is charged monthly and then of course compounded. This means it spirals upward very fast. I don't know about anybody else but my ISAs don't work like that ( I wish they did!). I certainly didn't clock this when looking into the loan originally. I wonder if this is not a case of mis-selling? Just try asking the SLC what the real AER is.
    Originally posted by gloucesteroldspot
    The AER is the published rate for the year. Just because it's applied monthly doesn't change that.

    It's just like asking for your interest on a savings account to be paid monthly - the monthly rate is a bit less take into account compounding.
    • badmemory
    • By badmemory 20th Jul 17, 3:16 AM
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    badmemory
    What guarantee is there that the government won't retrospectively change the fact that these loans will not be reported to the CRAs whether or not they are sold off to their mates (at well below mates rates).

    My apologies for putting government and guarantee in the same sentence.
    • HornetSaver
    • By HornetSaver 20th Jul 17, 6:50 AM
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    HornetSaver
    What guarantee is there that the government won't retrospectively change the fact that these loans will not be reported to the CRAs whether or not they are sold off to their mates (at well below mates rates).
    Originally posted by badmemory
    If the electorate were to throw all political parties under the bus who make promises they subsequently do the opposite of, this would act as a guarantee. (Sorry to give a borderline political answer in a good quality debate, but it was a good enough question to justify an answer).

    Did raise a slight eyebrow at Martin's suggestion that a supermarket shop for someone who has just graduated would cost £100 a time though.
    I'm standing by my pre-referendum prediction: "Brexit will lead to a recession"

    forums.moneysavingexpert.com/showthread.php?p=70662330
    • Ed-1
    • By Ed-1 20th Jul 17, 9:03 AM
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    Ed-1
    What guarantee is there that the government won't retrospectively change the fact that these loans will not be reported to the CRAs whether or not they are sold off to their mates (at well below mates rates).

    My apologies for putting government and guarantee in the same sentence.
    Originally posted by badmemory
    For that to happen the loans would need to be brought into scope of the consumer credit Act and FCA etc. which they've explicitly been excluded from in the Sale of Student Loans Act 2008.

    http://www.legislation.gov.uk/ukpga/2008/10/section/8
    Last edited by Ed-1; 20-07-2017 at 1:48 PM.
    • BoxerRules
    • By BoxerRules 20th Jul 17, 12:33 PM
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    BoxerRules
    I am not currently a student ( I graduated more than forty years ago) and I applaud Martin for his efforts to put this issue into perspective. It would be a great step forward officially to remove the concept of 'debt', with all its bad connotations of millstones round necks, ultimate personal bankruptcy and even the Marshalsea. If you must think in terms of debt, then try comparing it to the so-called ' Third World ', where countries borrowed money they struggled to pay back and were eventually in such dire straits that the lenders were forced to cancel the debt completely. With student finance you may feel you struggle to pay it back, but unlike ordinary debts like mortgages, car loans and the like, there is no life-long millstone and the system has a built-in guarantee that any liability to repay the sum outstanding disappears after thirty years. Wouldn't developing countries have loved a loan like that. What today's graduates have is a Personal Payment Plan and while Martin's description of a 'graduate contribution tax' is a bit clunky, it's accurate and is the best one available. I certainly haven't yet thought of a snappier title.
    Is it a good deal? Well, try applying the system to a house mortgage instead of a student loan. If you think you might currently be able to afford a £150,000 house, wouldn't you like to be able to go to the government , who would give you the money to buy the house and then say you need only repay a small percentage of what you earn above a low benchmark? What we'll do is add interest onto the sum outstanding, but after thirty years, whatever the total, it will be written off and you'll still own the house? An even better deal, you apply for a house costing £450,000 ( because it's just up the road and has a dedicated parking space) and the government still give you the money, still only want the same repayment as for the cheaper house and still write off the much-larger accumulated sum outstanding after thirty years!
    You can call such a mortgage comparison absurd, but that just illustrates why the Graduate Contribution Tax is different to a normal debt.
    The universities obviously understood the reality of the system, which is why they all queued up to charge the maximum amount for course tuition. They get the maximum money from the government up-front and leave the government to worry about reclaiming graduate contributions.
    I went to university 1968-73, when course fees were paid directly by government and I received a maintenance grant. No repayments required. However, the reasoning was that graduates were probably going to have a much-better paid career than if they didn't go to university, so over a working life of forty years the Treasury would get back much more in tax than it would otherwise and the investment was worthwhile. Importantly, however true this was, no-one could quantify it.
    Was I better off than today's students? It seems to me that in important respects the modern system is the same as that of yore. Course fees are still paid by the government and the student still receives money for maintenance. The difference concerns the attempts to quantify the students' contribution to defraying those costs over a working life. In my day it couldn't be done, so no worries were generated. Now an individual sum can be attached to each graduate and you can track how much he or she is contributing each year back into the nation's coffers. This insistence on information, transparency, call it what you will, generates the anxiety. So yes, I probably was better off, but only because I was more positive about graduating because no-one bothered to keep telling me how much I owed the state.
    One final thought . As to the politics, Mr Corbyn and the Labour Party should be supporting this system for its pure Marxist credentials. If I may re-order Karl's phraseology from 'The Critique of the Gotha', the student loan system fits exactly " to each according to his needs, from each according to his ability ( to pay-my italics)
    • setmefree2
    • By setmefree2 20th Jul 17, 12:46 PM
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    setmefree2
    Therefore, investing spare cash in a FTSE tracker (in an ISA, to avoid tax), rather than using it to pay off (or avoid taking) a post 2012 student loan is likely to give a higher long term return than the worst case student loan interest, unless you think the last 10 years are the new norm for equity returns.

    If you do this investment in a LISA, you also get an extra 25% one-off boost to your returns.
    Originally posted by koru
    Great point.

    As a parent of 2 post 2012 graduates if I have £36k (each) to clear their debts wouldn't I always be better off paying it into a LISA for them? Which they can access when they buy a home plus 25% (or at 60 plus 25%)....and which will receive the 25% boost plus interest/ dividend income / capital gains.

    ...Or put £12k into the more flexible Help to Buy ISA? Boosts savings by 25% if you buy a house but more flexible if you want it for something else before 60.

    Or give them the money to put into their SIPP?

    Ditto for a student who can afford to pay anything off a student loan - wouldn't they always be better off investing in a LISA or H to B ISA?
    Last edited by setmefree2; 20-07-2017 at 1:35 PM.


    • koru
    • By koru 21st Jul 17, 11:08 AM
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    koru
    Obviously adjusting for inflation, but even if you won't pay it all off due to high interest charges, if you would otherwise pay more than the amount you would pay to clear it now it is still worth doing.
    Originally posted by silvercar
    Not quite. You also need to take into account what you can do with the money if you keep it, rather than paying off the loan. If you pay off the loan, then you have lost the opportunity to use the money for other things for the rest of your life.

    You can put it in a savings account, to earn interest. You can invest it in equities, to earn dividends and capital gains. You can boost the previous two by 25%, in a LISA. You can use it as a house deposit, which reduces your interest costs because you are paying interest on a smaller mortgage and also because the higher deposit reduces the interest rate on the rest of the mortgage. There's a pretty good chance that this will earn (or save) you more than RPI +3% per year, on average.

    You need to compare those earnings (or cost savings) with the extra interest you would actually end up paying on the loan if you didn't pay it off. Worst case, this is RPI +3%, but almost no-one will pay this much.
    koru
    • koru
    • By koru 21st Jul 17, 11:16 AM
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    koru
    If the DfE are to change the formula for setting interest rates on post-2012 student loans this September they've got until tomorrow to change the law so it's highly unlikely that it will be changed this year.
    Originally posted by Ed-1
    I take your point, but if they decide it is politically necessary to reduce the rate, I'm sure they can find a way.
    koru
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