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

kaz0705

Stochasticity wrote: »

This is the key point though - the debts are to be wiped after 30 years. Currently, they're wiped after 25 years. Previously, they have been wiped once you reach certain ages. Therefore, that it might take your friend 200 years (or forever) to pay off the debt if she were forced to do is irrelevant because she isn't forced to do so. The debts also don't count towards credit scoring and they won't form part of her estate if he/she's unlucky enough to die before the debts are wiped.

The true impact of charging real rates of interest (and of increasing the repayment period from 25 years to 30 years and forbidding overpayment) is that a lot more people that previously would have paid off their entire debt before the 25 years were up will instead still be paying off the additional (compounding) interest until the entire 30 year repayment period has elapsed and their remaining debt is then finally wiped. As a result they'll end up paying a lot more.

Ah, we crossed over.... I see what you're saying but even 30years of a debt hanging over you is pretty scary!

And, as someone else posted: what's the point then? Get in massive debt, make small repayments each month whilst the loan balloons and... then get it wiped as you've barely made a dent in it after 30years? What a silly idea these politicans have devised!

Stochasticity

irishwench69 wrote: »

At a time like this when so many people have bad debts and the economy is the way it is, the last thing we should be doing is lumping people with potentially toxic debts when they're just trying to improve themselves.

Terms such as 'bad debt' and 'toxic debt' really aren't appropriate in the context of taking a student loan.

Much more than a debt, currently it is instead a licence for the government to tax income above £15k at a basic rate of 29% for 25 years or until the true cost of your borrowing has been paid off, whichever is shortest. As proposed it'll become a licence for the government to tax income above £21k at a basic-rate of 29% for up to 30 years or until the cost of your borrowing plus a real rate of interest has been paid off.

If you don't earn enough, you don't have to pay a penny back and it won't make a jot of difference to your credit score. There simply isn't any other kind of debt like it and it's certainly not comparable to paying for an extravagant lifestyle on credit, negative equity or anything with actual consequences upon default.

irishwench69 wrote: »

What would the cost be of introducing fees but keeping the cap on rates when it comes to loan repayments? Does anyone know?

The government currently lends up to about £5k per student per year and does not charge a real rate of interest on the borrowing, so the student pays back what they borrowed plus interest that only covers the effect of inflation on the value of money. The government itself has to borrow the money that it then lends to students and has to pay a real rate of interest to its creditors. It's basically the exact opposite of stoozing and involves the government giving a significant subsidy to students and incurring borrowing costs itself that aren't passed on to students.

Increasing fees will mean that the government will have to lend perhaps two to three times as much, so the size of the subsidy on student loans would increase by a similar proportion if interest rates on student loans were to remain capped in line with inflation rather than at the cost of government borrowing (which is higher than inflation). Nevertheless, the increased subsidy on student loans would be nowhere near as big as the savings made by shifting a significant portion of the burden of financing higher education from the taxpayer to the student as is the entire idea behind higher student fees and massive government cuts to the higher education budget.

Stochasticity

snmrw wrote: »

On MSE's own article on the decision to repay student loan, there is section about how long it takes to repay. Now I put in make believe details of earning £26000, interest rate at 4.4% with a debt of £40K. It says that after 25 years, my debt would be wiped out, so effectively I wouldn't repay all the loan. Now perhaps I have misunderstood, and please correct me so that I can learn, but then not being able to repay early the debts is a good thing? Especially if there is no impact of student loans on mortgages?

It's only a good thing in that it would stop you doing something silly via paying off something you don't have to pay off. But for all who will eventually end up paying off the entirely of their loan (net of the interest on top) at any point within the 30 year repayment period, not being able to overpay earlier will cost them money via having to pay much more interest, so for them it is a very bad thing and for the government it is a very good thing.

Stochasticity

kaz0705 wrote: »

Ah, we crossed over.... I see what you're saying but even 30years of a debt hanging over you is pretty scary!

And, as someone else posted: what's the point then? Get in massive debt, make small repayments each month whilst the loan balloons and... then get it wiped as you've barely made a dent in it after 30years? What a silly idea these politicans have devised!

The size of the repayments are fixed though as they are taken via PAYE, so they are directly proportional to the amount that you earn. Any 'strategy' to avoid repaying the student loan would have to involve a lifetime of pretty low pay, especially as I very much doubt that the government will faithfully index the £21k repayment threshold to inflation. [EDIT: Though it's worth noting that the proposals involve the threshold being periodically adjusted (every 5 years) to keep it broadly in line with earnings growth.]

There's still no reason that I can see for considering it to be "a debt hanging over you". It's more like an extra form of taxation hanging over you. If you're on a modest £20k a year, do you see a £80k+ income tax bill hanging over you? Of course you don't, that's just the amount of income tax you'll have to pay over the next 30 years, and even then only if you carry on earning at your present rate (in the same tax environment). Instead you just see it as something that you'll eventually have to get around to paying chunk by chunk from your paycheck every month.

Sobraon

This fees policy is simply political violence perpetrated on the next generation of English adults by a vicious ConDem UK government and it must be resisted by all lawful means. The young people of this nation are our must precious capital and treating them in this way is cultural suicide.

It’s good to see Martin finally beginning to understand that the English proles are not going to put up with this symbolic violence and “call-me-Dave” (and his lying batman) need to get that message straight.

Is there another way? Well, here’s some practical ways to raise the money, firstly we could reduce our military expenditure to that of Germany’s, that’s £20B/yr saved for a start. Alternatively, how about selling of the Palace of Westminster and hiring some porta-cabins in an industrial estate in Milton Keynes and come to think of it, Buck House could be redeveloped and HM could perhaps spend a little more time in one of her other residences. Or, shock horror, we could even stop paying for the Indian space programme. After all we are all in it together aren’t we?

Clowance

My dau is in GCSE year and is very bright. She wants to go to uni but is afraid of the cost - limiting her choices to the two near home so she can still live at home. One is awful, the other ok.
Even living at home if the tuition fees go up to the full £9000 (and I think when first introduced all the unis charged the max allowed straight away, so no use hoping for less) this is £27000 plus travel (£2400 per year train and another £400 per year bus to get to uni) and also incidentals. No part time jobs at the moment in a recession to help with the cost (I was laid off myself a month ago). We can cover food and lodging at home but can't help beyond that. At the end of her course she is likely to be about £37000 or more in debt. I don't know what career she will pursue but would be on not very much - 18000 to 20000 outside London for a year or two. Then a period of higher earning - say 10 years by which time maybe 10000 paid off. Then if she is lucky she gets a mortgage, settles down, has a baby. She may or may not wish to continue working, if something goes wrong the choice may be taken from her (health of her or her child for example). If working, childcare costs will eat in to her pay. If not, the loan will be mounting up with interest. When she goes back to work it may well be in a low paid job to allow part time hours. Is the above unlikely? Well it happened to me and to many of my friends, but we are lucky enough to have been educated in the days of student grants.
Also I cannot believe that banks will not take into account "ability to pay" when calculating mortgages - they might ignore the debt itself but are bound to lower the total amount they are willing to lend at a time when you need a high multiple of your salary to buy a house.

Martin - its all very well assuming that the vast sum you will owe will be easily paid off by the bigger salaries earned by graduates but in fact outside London those big salaries are hard to find. And many women and some men have breaks in their employment to bring up families - the debt accruing interest is bound to be a significant worry to them.

My advice to my daughter would be to think carefully about whether the course she chooses will lead to a lucrative career - or to start her own business without bothering with a degree. The days when you could study for study's sake as I did (History and American studies) are long gone.

Stochasticity

Clowance wrote: »

At the end of her course she is likely to be about £37000 or more in debt. I don't know what career she will pursue but would be on not very much - 18000 to 20000 outside London for a year or two. Then a period of higher earning - say 10 years by which time maybe 10000 paid off. Then if she is lucky she gets a mortgage, settles down, has a baby. She may or may not wish to continue working, if something goes wrong the choice may be taken from her (health of her or her child for example). If working, childcare costs will eat in to her pay. If not, the loan will be mounting up with interest. When she goes back to work it may well be in a low paid job to allow part time hours. Is the above unlikely? Well it happened to me and to many of my friends, but we are lucky enough to have been educated in the days of student grants.[...]

Martin - its all very well assuming that the vast sum you will owe will be easily paid off by the bigger salaries earned by graduates but in fact outside London those big salaries are hard to find. And many women and some men have breaks in their employment to bring up families - the debt accruing interest is bound to be a significant worry to them.

I think you're missing the point. If she doesn't earn more than £6,475, your daughter won't have to pay income tax. If she doesn't earn more than £21,000, she won't have to pay her student borrowings back. What debts remain after 30 years of repayment will be written off (along with all of the interest added on top).

Also I cannot believe that banks will not take into account "ability to pay" when calculating mortgages - they might ignore the debt itself but are bound to lower the total amount they are willing to lend at a time when you need a high multiple of your salary to buy a house.

Your student loan doesn't show up on your credit report, so it is not a factor at all in mortgage (or other lending) decisions as made by banks, building societies etc. In fact, if anything, responsibly using a student account overdraft (and student credit card) will improve her credit rating.

The only difference that the student borrowing may potentially make to a lender's decision is a lower net salary (and even then only if earnings are over £21k).

My advice to my daughter would be to think carefully about whether the course she chooses will lead to a lucrative career - or to start her own business without bothering with a degree. The days when you could study for study's sake as I did (History and American studies) are long gone.

My advice to her would be to choose on a fully informed basis, knowing that going to university will add 9% to the future tax bill she faces on salary above £21,000, and knowing that it is possible that, in the long run, she might pay back anything from not a penny to the cost of her borrowing a couple of times, all via PAYE.

rdtrdt

Simon_c wrote: »

Absolutely.
Universities ware going to be in for a rude awakening if they think students are going to put up with paying £250/week for a couple of lectures and 1-2hr tutorials.....

I'm astonished that the "value for money" aspect has not become more prominent.

Many of my Uni lectures were in a lecture theatre containing 120 or so students. Plus there was some (inexpensive) lab work and a tutorial. This at a decent 'proper' Uni too.

This would not cost anything remotely like £6k-9k per annum. My estimate would be more like £2k per annum.

Universities must be using tuition fees to cross-subsidise their other activities (such as PhD research etc), whereas by rights those other activities should be raising their own funding - or not occurring if they cannot successfully attract funding because their research is not attractive to a funding body.

Students should not be subsidising Universities' other activities.

Why are student bodies not shouting from the rooftops about this value-for-money aspect? When buying goods or services you first decide on a price, then start thinking about the financing details. The price being asked of students would seem to be a few hundred percent higher that it should be!

Incidentally, I think the financing proposals seem reasonable. It's reasonable for students to pay "inflation+" interest, since the Govt will be borrowing long term at "inflation+" in order to finance these loans. The proposals seem reasonable to me, but the cost of courses does not. Thus, there should be opportunities for Unis to be enterprising when it come to designing innovative value-for-money quality degree courses.

jeanmd

Thank you for the blogg Martin. Having it all put down in plain English is helpful.

I believe that the protests have escalated because the government has stopped EMA at the same time as increasing Uni fees and the interest. All this hits the same age group - Young people who are really wanting an education.
First to go was the 3 term £100 bonus with immediate effect.
Next is the (up to) £30 weekly EMA next September.
Third is the increase in tuition fees/interest in September 2012.

All the above affect the same 15-18 year olds. It's hard enough for them to decide what they are going to do with their future without having all this thrown on them. I really think that this will put quite a few off further education. This is why children who should be in school studying for their exams are on the streets protesting.

Money_Saving_Dude

The answer to the student fees problem is simple. Go to college, get a degree then do a runner and leave the country. While UK degrees still have a reputation you will be able to work elsewhere, either in Europe or the rest of the world. If you are starting your employment in your early 20s you will have similar (maybe better) life chances as you would in the UK.

Then, 30 years later, come back to the UK to retire. Simples!

At least that's the advice I've given to my kids. What is it with this country that it seems to think you have to pay for everything? Why is everything so short sighted? The UK in 2030 or 2040 is looking like it will be a horrible place.