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

kittykitten

setmefree2 wrote: »

But paying a small amount back forever and ever means that you will pay back a lot more than you ever borrowed......

Do you know how much you will pay back?

In real terms, I will pay back exactly the same amount that I borrowed.

kittykitten

riskaverse63 wrote: »

I am a keen Money Saver with one daughter just started uni this year and one to follow in 4 years time so i want to understand this and i have been trying very hard to. Even this site isn't helping me. I want my youngest to have the same opportunity as her sister. What would help me is a clear guide to the two systems we will be faced with which will allow me to explain to them how much they will both be paying back over their working lives. Does this exist?

As it stands at the moment, in basic terms: your daughter who is at uni now will pay back 9% of everything above 15k that she earns (although that may be about to change, so hold that thought). Your younger daughter it is not possible to explain this to at the moment, we're just going to have to wait for the fine details to be thrashed out in parliament as I suspect there may well be more wrangling re: exact details, but the basic plan is that future graduates will pay back 9% of everything above 21k that they earn.

kittykitten

jamesd wrote: »

kittykitten, student loan debt does affect your credit rating when it's being repaid because it reduces your disposable income. Not all potential lenders will include this factor, it's up to them whether they do. Some graduates might also make fraudulent loan applications that don't include loan repayments, when asked about monthly expenses or loan repayments. It's important to properly declare all loan repayments or regular expenditure if asked about it.

Your disposable income and your credit rating are, generally speaking, 2 different things. You're correct in saying that most lenders will, when looking at an income, look at bottom line, which is obviously after student loan comes off your payslip so this is slightly reduced, but your credit rating, for most high street lenders, is as much, if not more, about the risk of you deafulting and generally this decision os made by looking at your credit history (reliability) and access to current credit (having a large number of credit cards or loans on the go can work against you).
By your logic my pension contributions are working against my credit rating, when in fact those few lenders who do look at both top line and bottom line salary actually are known to take a good view of those who pay into company pension, as it shows forward planning and reliability.


I know that I am, in a way, lucky as I am living with parents while saving for a deposit (yes, before anyone asks, I do pay them rent) and was taught from a very young age by my parents about money, credit and debt, but not from a point of view that all debt is bad. I also spent time working for the dreaded black horse (aka LTSB) so have seen from the inside how the system works and what is classed as good and bad when it comes to risk.

Higher tuition fees won't make student loan riskier debt and won't really have an adverse effect on people's credit rating, as the amount you pay is calculated by salary, not the amount you owe. When applying for credit, say for example a mortgage, the lender is much less interested in how quickly you're going to pay the student loan off so have that extra 50 quid or so in your pocket, and more interested in are you overstretching yourself at this point in time. For most people who are earning enough to be paying back their student loan, the percentage they lose from their salary each month really is negligible when it comes to credit applications.

Last thing, I promise: just to prove a point I just dug out last month's payslip - on what is an annual salary of £27,500 I actually earn, iin gross monthly pay, £2300. Each month I lose £321 in tax, £170 in NI, £150 in pension, and (a very low when you consider all that) £94 in student loan. I can quite easily live without that student loan, as it's money from my pay that I never had in my hand. I come out with £1500 per month.

setmefree2

jamesd wrote: »

setmefree2, hopefully you won't go and produce numbers that aren't corrected for wage inflation. Wage inflation is likely to be high for many graduates, greatly increasing the value to them of delaying repayment because it frees up money early on when their finances are most tight and then repayments become trivial towards the end of the term after years of wage increases.

Having any interest rate that's above wage inflation will increase the real cost of the loan but it's often worth accepting that to get the money repaid at a time when it's more affordable. It's still an increase in real cost of the loan, just one that may well be worth accepting to defer repayment.

Thanks for your post. All Good Points

setmefree2

riskaverse63 wrote: »

No wonder there is a lot of anger and fear about student fees. We are not given enough information to make sane decisions.

Oh my! Are you my twin? - that's exacty how I feel:D

setmefree2

riskaverse63 wrote: »

Again i am not in a position to have an informed opinion on this as i can't find any useful information to help me understan.....

And there is a great deal of misinformation. I get the feeling that a lot of people are making stuff up :cool:

And don't go anywhere near the students money saving board as you will be fiercely attacked for being an interfering parent....unbelievable! I can honestly say that I have never a more unhelpful and hostile bunch of posters on MSE and I use the Economics board and the Discussion Board so that really is saying something!

jamesd

kittykitten wrote: »

By your logic my pension contributions are working against my credit rating

Yes, that's what I'm saying. Anything that reduces the amount of money you have available to repay credit will reduce your credit rating if the lender considers that factor.

I fully believe that the cost of your student loan repayment is minor for you. The payments under the new proposals also seem seem to be quite easy to afford, given the way they are related to income and don't even start until the graduate is earning more than half of the population.

reevery

The 9% is the current proportion of your salary above the threshold you repay, not the interest rate. That was proposed on Thursday and is the same as the current rate.

The proposal on Thursday last was this:

If you are earning up to £21k, interest rates are no greater than inflation. So no real increase in the size of your loan.

If you are earning above £21k, you will be charged a real rate of interest, with the maximum interest rate being RPI + 3% (at £41k or above).

I am not entirely clear if the proposal is a straight line or staged, but the more you earn the higher the interest rate.

I can see the main problem being that repayments are on earnings above threshold but interest is on the whole loan. I don't think the break-even point is significant though at current rates.

Some summaries:
Current system earning £14k: not repaying, interest rate is approx 0%.
Current system earning £31k: Repaying 9% of £16k (above current £15k threshold) so about £120 a month. Interest rate approx 0%.

Future system earning £20k: Not repaying, interest rate at RPI (about 0.2%?)
Future system earning 31k: Repaying 9% of £10k (amount above new threshold) so repaying £75 a month. Let's say interest rate is RPI + 1.5% (half way up scale) so interest on a £30k loan would be about £37.5 a month.
Future system earning £50k: Repaying 9% of £29k so approx £217pm. Interest at RPI+3% on £30k loan is still £75.

reevery

lighting

Where did you get that anyone earning £21k would be paying 40% tax? That's still easily in the basic (20%) income tax rate and when you do the maths taking into account allowances etc it's less than that. The interest paid on the loan at that rate would be tied to RPI.

That £15k you saved up, even now you should be putting it in a savings account where it will earn more interest than your child would accrue from the loan. You should only voluntarily pay it off when the interest is higher on the loan than in the bank. The Government are talking about introducing a fee for that, like most mortgages.

The variable rate of interest is to discourage people who can afford to pay for their fees to take the loan, stick it in a bank account and make a profit from it.

DaveO

The whole policy is a farce.

Martin says he is bothered about the fact the loans interest compounds and people can't pay it off early.

Well if the government kept the subsidised rate of interest charged now the fact they will be forcing the students to borrow more would mean the subsidy would cost the government more. It soon reaches a level whereby the subsidy wipes out the savings that they intend to make. So that is why a real rate of interest must be charged.

In short if you are going to put fees up to this level you can't afford to subsidise the loan so the cost is going to be born by the graduates. What a brilliant idea that is - not.

As to not paying it off early well that is a political decision to try and make it "progressive" so we don't end up with those earning the most money paying less for their education as they avoid interest by paying off sooner. It still does not prevent the wealthy circumventing the loan system altogether by paying the fees up front so paying least of all of course but that is why the early repayment penalties are there. If this is a crazy idea it ought to tell you the policy that is forced this kind of decision onto Vince Cable and his crew is also crazy.

As to the loans being written off after 30 years all that does it defer the cost of the loan system and is no doubt why the IFS are saying this is going to cost the tax payer more in the long run.

However the bottom line is we don't need a loan system at all. Has anyone actually bothered to work out how much tax we pay to subsidise the teaching grant? I looked up the 2008 figures for the total income tax take and the teaching grant makes up just over 1.05% of the total tax take. So to work out how much of your tax you pay toward the teaching grant per year work out 1.05% of your income tax.

At today's tax rate that works out at £7.40 per YEAR for someone on £10K a year, a postman who's basic starting pay is just over £16K a year pays about £20 a YEAR and someone on £60K a year pays a grand total of £146.25 a YEAR towards the University teaching grant.

Given over 90% of the salaried working population earns less than about £45K a year then 90% of us pay a lot less than £146 a year to provide our young people with a University education. If someone averages a £30K a year salary over a 50 year working career then at current rates they would pay a grand total of around £2500 over their entire working career toward the teaching grant.

And we want to replace that with a loan system that lumbers graduates with a debt subject to compound interest? To my mind it does not matter if you only start paying it back when earning £21K or it gets wiped after 30 years because I think the figures show the fairest and cheapest way for all concerned to pay for this is out of general taxation which is inherently progressive and cheap to administer. No means testing and no student loans company to screw things up and dare I say it, no profit motive or introduction of market forces into education.