MSE News - Tuition fees furore: what exactly are the plans?

Taiko

melancholly wrote: »

andy - Taiko used to work for the SLC (i think - EDIT: as i thought you left late last year?). they know more about the systems than most of the rest of us combined!

the new system isn't a disaster for students (it's not great but no fee increase would be and otherwise the hole in funding would be too great); i think it's a disaster for universities though.

Left in November. Received a handwritten letter from David Willetts today thanking me for my service, which has came out of the blue.

Until such time as we gain the ability to see the future, nobody will know the full cost. However, for arguments sake we'll say you get a student paying £6000 fees for 3 years, plus a maintenance loan totalling roughly £10,200.

They graduate, and for arguments sake earn £26,000 every year for 30 years. We'll also keep the £21,000 threshold as an example for repayments.

£5000 x 9% = £450.
£450 x 30 = £13,500 repaid over the lifetime.

Total of the loans would have been £28,200 + interest, so it actually costs the taxpayer a lot more than what the student would repay.

melancholly

Taiko wrote: »

Left in November. Received a handwritten letter from David Willetts today thanking me for my service, which has came out of the blue.

Total of the loans would have been £18,200 + interest, so it actually costs the taxpayer a lot more than what the student would repay.

that's really nice.... although i do think he might be the devil so i don't know how to factor that into my opinion conflicting!

i don't understand the changes in terms of cost - just the cost of changing the system must be massive and there really is no evidence that it will save the tax payer any money (unless of course, they expect there to be far fewer universities in the not to near future and have an ideological reason for trying to privatise higher education!). maybe i just need to factor in working until about 75 in the equation

andy465

sorry one last message, thanks for doing the calculation, and you are right about people who don't earn enough to pay it all off in 30 years, but I'm not happy on my current salary, which is more than £26k.

If I were to guess my average salary over 30 years, I'd probably say £45-50k in average in the most pesimistic circumstances, so an example calculation for say £45k this is the following. It's added complexity because of the compound interest. I might get it wrong in this calculation, but my spreadsheet does it month by month so gets the compound interest right.

45000 - 21000 * 0.09 = £2,160 in deductions per year.

I can't find the time to do the correct formula for the compound interest my spreadsheet does but here's an in-exact method:

3% RPI/yr + 3% income-dependent interest = 6%

10 year's balance after interest (before taking ded1uctions into account) = 27000 * (1.06^10) = £48k

deductions + reduced interest = 2160 * 10 * ((1+0.06/2)^10) = £29k

The 1+0.06/2 is to fake the interest on a series of regular payments, inacurrate in that form though.

£19k still left to pay off after 10 years. Current balance + deductions = 2160*10 + 19000 = £40.6k

another 10 years, balance is 19000 * (1.06^10) - 2160 * 10 * ((1+0.06/2)^10) = 34026 - 29028 = 5k

balance + deductions = 2160*20 + 5k = £48k

The whole total will be paid off a few years after that at something around the £56k I mentioned. In-exact method, but close.

atypical

andy465 wrote: »

people earning around my amount would be the hardest hit, whilst higher earners pay less. It would be solved by simply being RPI.

Don't the calculations show that this isn't true?

Earn £21k = repay £13,500
Earn £45k = repay ~£56,000

Higher earners won't pay less unless they manage to average a ridiculously high salary that means they repay so quickly that the interest effect has little impact. But this will be very much the minority (incidentally the starting salary of a graduate in investment banking is ~£42k base + the same as bonus).

Using RPI wouldn't have made the numbers add up, they need the higher earners to subsidise those who go on to earn less. Trying to catch the very high earners would have added unwanted and expensive complexity.

I'm by no means trying to justify the new system. You'll see from my previous posts that I'm hardly a great supporter of them.

andy465

If RPI is a good measure of inflation, then the balance of your loan, at a interest rate of the RPI. will stay level in terms of buying power for the full 30 years.

If the rate is higher than inflation, then there is a increasing value of the loan which peaks at the point that the earnings pay off the loan in its entirity exactly 30 years later, which at RPI + 3% is the middle-income group.

I'm not saying that that is technically unreasonable in itself, but the 300% increase in tuition fee (900% compared to mine), and the fact the higher earners will pay less in terms of buying power in their lifetime makes this unfair.

In fact graduate tax would be a better fit for what you mention whilst taxing the very-high earners to make up for the lower earners.

The repayments don't need to be fully completed for all graduates, as it equates to a government subsidy on the lower earners compared to them giving the universities a standard subsidy for any student, which would be the result of abolishing fees.

Derivative

Quite frankly the whole idea of higher earners being made to pay 3-4 times more than current median wage earners is ridiculous to me.

The whole reason rational people go to University is to get a well paid job (besides the current majority of dossers, and the rare few that go purely to learn).

RPI+3% is essentially an 6%+ variable loan (sub 3% RPI is fairly rare)
At a glance without proper analysis you can see that presents a problem, 9% of a sub 60k salary to pay a 6%+ APR loan.

Smells like grad tax to me. On a decent salary you'd be paying 9% for 30 years.

andy465

Ok, I decided to lookup the formula for repayments on a loan, see:

en.wikipedia.org/wiki/Interest#Formulae

That can show the salary that is the peak monthly deductions at RPI of 3% (ignoring PAYE student loan deduction roundings):

(((B0-Bn)/POWER(1+r;n)-1)) + B0)*r

e.g. r = (RPI + 3%)/12, n = 30 years x 12 months, B0 = student loan, Bn = balance at the end = 0

= (27000/(POWER(1+0.06/12;360)+1) + 27000) * 0.06/12 = 161.88 / month

= 161.88 * 12 / 0.09 + 21000 = £42,583.82 salary

the deductions in total will cost 161.88 * 360 = £58,276

I've decided the formulae is pointless to calculate, as for every year you don't earn enough to pay more than the interest rate, the higher the balance is going to be for when you earn enough, so the likeliness of early payoff entirely depends on what your salary progress is like. Its best just considering the worst case scenario of (9% > 21k for 30 years, where the 21k may increase with inflation) for people not expecting to become stock market brokers or other very high paying jobs.