'The argument over student loans could kill the next generation's...' blog discussion

slygent

It's good to see the information about the loans being put clearly (although some people still seem to misinterpret it or just find debt "scary" without looking at the details...).

One point that Martin didn't discuss this time (or at least I didn't see it) but did in a previous blog post is the proposal to not allow early re-payment. Is this proposal still on the table? If so then I have to agree with what Martin said about it before: that it is a disgrace. What possible justification can there be for it? It isn't fair under any definition of the word. As an earlier poster here noted, the Conservatives in their manifesto mentioned early re-payment of the loan as a brilliant idea!

Do you know what the latest is with this, Martin?

dave2

Good article Martin execpt I think you understated the impact of their applying a commercial rate of interest.

I tried doing the math on these loans. Unfortunately I don't have the time to figure out a proper calculation method, but even just assuming:
- student takes out £8k for each of the 3 years;
- constant interest rate of 6%
- interest charged on the balance at the end of the previous year (this will actually understate the interest charge)

Then of course there is the way salaries increase due to promotion etc. For the sake of simplicity I assumed our student goes straight from uni into work, then only gets an annual "cost of living" pay increase equal to inflation (i.e. equal to the threshold increase).

This is actually very sensitive, because once your salary is above the threshold then inflation starts compounding on the amount that you are paying over 9% on.

Anyway, accepting this is back-of-a-napkin stuff:

If we were to say the interest rate is just 6%, then in the first year after uni it will be £1,500. Therefore, just to match the interest charge you need to be earning £21,000+(£1,500/9%) = £37,667.

Due to the compounding issue mentioned above, this would actually result in full repayment after what I'll very cautiously suggest is about 25 years of working. Starting on £33,500 would take around 40 years.

In sum, this is a graduate tax where the effective rate very much follows a normal distribution curve. For the lowest paid it is a progressive tax that (quite steeply) increases the rate with earnings. However there is a point where it becomes a steeply regressive tax whereby the more you earn the less you pay in total.

It all hinges on if/when the loan is ever repaid, and is a direct result of the commercial interest rate compounding.

For most of them however this simply adding 9% to the rate of tax on earnings above £21,000, because they'll never be repaying the loan. A tax that the rich can avoid by paying the fees out of their trust fund.

So, should students repay their loans ASAP? Should parents save like crazy so their kids can pay the fees up front? Here's the stinger: there is no clear answer. This goes back to the regressive/progressive point. Those who will end up not making great money will never repay the interest anyway so they're better off maxing the loans and repaying as little as possible!

1maia

I've been to university under the old and new rules so i know about the loans system, and spend most of my time with poor/working class people at work and where i live, and every single one of them, no exception, has only understood from the headlines that they will be in as much debt per year as their mother earns in two as a cleaner/similar ratio. None, absolutely none, has had any inkling that they would be eligible for a grant and an increased loan, let alone hardship loans and grants from universities. Just as the papers/news on tv are aimed squarely at the sort of people who can afford to go on three holidays a year, the coverage means the really poor think it applies to them and look no further. The sheer sums of money involved are so great in the scale of their lives that they alone are enough to scare them off. I didn't meet a single middle class kid at university who wasn't absolutely blase about it: 'i can easily pay it off in two years, i'll earn four times what i would have' (it was a top uni, so that was true). It is important that, for once, the newspapers stop scaring people for long enough to put the message across clearly, or the 5 people i met who had been to state school in three years at UCL (not mates, just total of people i met, including 2 rich people's children) isn't going to increase.

Also, i can't believe that the same help will be available to the child of a couple on £30,000 a year who live near the uni and are generous with their money as to an orphan fresh out the care system with no one. Education, below a certain level, should be free. That should be means tested, it should factor in things known to affect the demographic - time in care during childhood, remote/rural location, disabled parents etc - it should be quite low, £10,000 or £15,000 - that's not actually expensive to fund, because hardly anyone from those levels goes to uni, obviously it would be unaffordable if they did - and it should be free.

pjala

Martin, is this 9% tax on wages above 21000 subject to normal taxation rules? That is, under normal taxation rules if you make a pension payment this will reduce your taxable income - i.e. if you pay 1000 pension out of a salary of 30000, then your taxable salary reduces to 29000.
Would your student loan payable also reduce down to the loan payable on 29000?
I strongly suspect that this is not the case, so although your real wage is 29000, as you are paying 1000 in pension per year, you will have to pay a student loan amount determined by the gross amount before pension, i.e. 30000. This problem also makes it harder for young people to save for a pension - it becomes a double whammy. I mean effectively they are being taxed at 9% on 9000 in this case, when they only have 8000 of income.
The tax rate is therefore not 9%, but 10.125%. The more you contribute to your pension, the higher your taxation rate.
If the same person contributed £2000 to their pension, their taxation rate would increase to 11.57%.
This is also a message that we don't want the young to take in surely?
This is also important for those situations where pension contributions are automatically taken from wages -as with the new system being instigated. This will definitely mean that the 9% is a spurious taxation rate above 21000, and will ALWAYS be higher.
The more you do the maths, the more it looks like a regressive taxation policy more like poll tax, hitting those who can least afford it.

lizsalisbury27

When the millionaires in the cabinet went to university and got their free degree less people went, now more people go to uni (from the working class) it's time to pay!!!

All I have heard for the past week is how small the amount is that is paid off every month due to this change in student loan policy. The longer it takes to pay off the debt the bigger (and more expensive) the debt is due to the interest it will incur. Therefore the lowest paid graduates will pay more than the higher paid, sound familiar??

And the longer the millstone is round your neck!
Great start to life!!!

pjmony

Martin, thanks for the article.
However, I thought your sums were a bit misleading.
Sure, if you have a debt of £21k under the new rules you pay less per month than under the
old rules.
However, under the old rules you'd only have a 3rd of the debt to start with.
Or have I got that wrong?

My objections to these charges are as follows :-
- people assume that you're investing in your future. NOT NECESSARILY. I've seen reports from
the USA where claims that a degree gives you a larger salary are exaggerated by colleges.
Degrees are not as highly regarded as they used to be.
- the very people who got a free education, have been paying into good pensions and have
benefited from house price inflation are the same ones who are saddling our children with
large debts.
Youngsters will end up with this debt, wont be able to afford their first house, wont have as
good a pension.
They'll be expected to pay for/look after the same bunch of selfish people who lumbered them
with this poor situation.

webwiz

I have long been a supporter of the idea of a graduate tax, but the way it has been implemented is a disaster and has the fingerprints of the civil service all over it because a main effect is the huge unnecessary bureaucracy. Tertiary education could be organised in the same way as primary and secondary is. The government would set the curriculum and pay all the costs out of taxation. Graduates would pay a higher rate of tax to reflect the higher income potential deriving from their uni education. No fees no debts. Universties would be free to offer other courses for payment and graduating from these would not incur the tax.

XRAT

Thinking of helping your kids through Uni? Think they don't qualify for a grant? Read it ALL!

The loans have to be paid back but the Maintenance Grant does not.

These grants are awarded as follows;

Household income Grant
£25K £2906
£30K £1906
£34K £1106
£40K £711
£50K £50

The grants are based on your household income two years prior to Uni, so income for students starting this summer (2010) was based on the 2008/9 tax year. (Or the year they start 'A levels')

BUT your pension contributions are subtracted before your household income is established.

So if you are able to defer paying pension contributions to the the appropriate years, or thinking of making lump sum payments timing is key. Also of course tax is rebated on your contributions i.e. for each £8K you pay into a pension your household income is reduced by £10K for a basic rate taxpayer, higher rate taxpayers £6K for the same £10K reduction, and £5K for top rate tax payers.

A £40K householders who were able to pay a pension contribution of £12,000.01 to get under the £25 threshold would gain their offspring £2,906. (On top of their own pension gain)

I do hope that's understandable!

iansoady

brat673 wrote: »

Uni Tuition should be funded from General Taxation even if a penny or 2 is put on Income Tax. We should all benefit from their education.

I couldn't agree more. We all benefit from having a better educated population - and if it's true that having a degree increases your earnings, then a progressive higher rate tax would ensure that those who have benefited most pay most. If we just retrieved half of the unpaid / evaded tax that is lost every year it would more than cover the cost.

In fact, all education under the age of say 21 should be free as well as attracting a maintenance grant. If people don't take it up at that age then it should be held for them to use at a later date.

People without degrees on high salaries may wail that it's unfair but I don't buy that. And by paying from a higher rate tax (say over £100,000 p.a) then the usual silly argument about low paid workers paying for others to be educated evaporates.

Cardelia

rgoodger wrote: »

If all this is true, then what is a student getting for their £9000.
If this is true the maybe Lecturers should be renamed Researchers.
We complained about overpaid Bankers. We need to look at the pay our University Lecturers,,,sorry Researchers are paid. Do they provide good value for the time they put into the students. Where is OFSTED when you need them.

Again, why is it about what a student "gets" for their money? I repeat myself from earlier: a university education is not a commodity. Once you become a university student you are an adult, you are responsible for your own education. Lecturers should not be giving everything to a student on a plate, students actually have to go away and do some of their own research.

If you really want to know what a student "gets" for their £9k a year, then the answer lies with the students themselves. The best students will use all the facilities and resources of a university to educate themselves above and beyond what is given to them in the course material. The worst students will not do this. It's strange how you don't seem to hear students with a first complaining that their course wasn't value for money.