'If no-one will fully repay £9,000 student fees, how is the system sustainable?' blog

flimsier

melancholly wrote: »

just to add that while the rules have changed, they have never been changed retrospectively (RPI/CPI aside!). the rules for repayment were clear when the loan agreements were signed. they may be changed for the next year's intake, but once you're in the system, it stays the same. i pretty much expect the terms/fees for future students to be worse, but they don't change things for existing cohorts (which is why giving a lot of advice on student loan repayments is tricky; there are so many systems running concurrently - no-one gets shifted onto the new system).

So you're suggesting this is a lie are you?:

"The interest rate was supposed to be based on either the retail price index or the bank of england rate plus 1% depending on which is lower. Yet when the RPI went into minus figures they decided not to stick to that."

That was certainly retrospective.

melancholly

flimsier wrote: »

So you're suggesting this is a lie are you?:

"The interest rate was supposed to be based on either the retail price index or the bank of england rate plus 1% depending on which is lower. Yet when the RPI went into minus figures they decided not to stick to that."

That was certainly retrospective.

ok, well yes, as i said, the interest rate issues aren't really what i meant. the point was that the number of years you have to pay it back hasn't been changed for anyone once they signed up.

i'm not suggesting anyone is a 'liar' and i'm not sure that being that aggressive helps. there are issues with the loans (plenty!), but there are posts on here suggesting that previous governments have made radical changes to the student loans T&Cs, which isn't the case. i'm no defender of the system, but through being a student for the best part of a decade and hanging out on the student board on MSE for a while, know more about it than most.

it's always been a little odd to have the interest rate for a whole year set by one single month, rather than an annual average. on the negative RPI year, students lost out. however, there have been so many other years where March was less than the average so it evens it out. it was a pretty massive issue when they didn't give a negative interest rate, but most people who didn't have loans just kind of thought well tough - it's at 0% and you shouldn't really complain. i can see their point to a large degree!

personally, i think this one incident is a bit of a non-issue about the student loan system as a whole. i think it's a little disingenuous to use this to suggest that T&Cs are massively changed on graduates after they have taken out the loans. (and long term, the financial implications of RPI versus CPI are going to have a much bigger impact than one single year of 0% being applied)

flimsier

So the rules have been changed retrospectively. Thanks.

melancholly

flimsier wrote: »

So the rules have been changed retrospectively. Thanks.

*sigh* btw, you catch more flies with honey than vinegar.

tyler80

When I first started paying my loan back it was a percentage of anything earned over 10k, now it's anything over 15k. Now that change of course works in my favour but I'm not clear how and why the limit was changed. Whether it's based on a term set out and thus could increase again in the future. It's conceivable that 10 years down the line minimum wage could be approaching the limit where you start to repay.

As a naive 18 year old I never understood the difference between pre and post 1998 loans in terms of the way they're paid back. I thought repayments would be based on average earnings and thus at least keep some sort of pace with reality. I know plenty of people who earn a fair chunk more than I do yet have never had to pay back a penny of their pre-1998 loans.

At least one thing is sure, there's a lot more information now so people can enter these agreements with eyes wide open. I'm not even sure what information was available at the time I was making my uni choices, the act that allowed for the introduction of fees wasn't passed by parliament until after I'd sat my a-levels.

I'd question how many 18 year olds really understand the implications, perhaps they should have to pass some sort of test on compound interest before they can sign up ;-)

tyler80

Some more test questions

Clare has a student loan, the bank of England base rate is 3.5% and March's retail price index is 4.2%. What interest rate does she pay on her student loan?

David is currently paying 4.3% interest on his student loan. He went to work for the public sector after graduation and his pay has been frozen for the past two years. His student loan is effectively interest free, true or false?

wozearly

flimsier wrote: »

So the rules have been changed retrospectively. Thanks.

As far as I know, they didn't change the rules retrospectively - they made use of a clause that was always available in the student loans system of the time to not charge interest for any given year, hence avoiding needing to reduce the size of the loans due to negative RPI.

So despite it being out of the ordinary, it wasn't actually a retrospective change. Not great news for those affected (myself included), but not a reason for flagging retrospective changes as a reason to be doubtful of student loan financing for the future.

tyler80 wrote: »

Some more test questions

Clare has a student loan, the bank of England base rate is 3.5% and March's retail price index is 4.2%. What interest rate does she pay on her student loan?

David is currently paying 4.3% interest on his student loan. He went to work for the public sector after graduation and his pay has been frozen for the past two years. His student loan is effectively interest free, true or false?

Heh...well, on the previous systems (the new one is slightly murkier) Clare would be seeing an interest rate of 4.5% for that year, assuming that March refers to the previous year's March figure, because the loans always go up by 1% over BoE base rate as a minimum.

Unless the government elects not to charge interest that year, in which case her interest rate would be 0% (but don't hold your breath, Clare...).

For David, the answer is categorically false - the loan isn't interest free as its still rising at 4.3% due to interest irrespective of what this means in real terms (ie, how much the money actually buys after you've taken inflation into account). In fact, only the first six words of the question are relevant to the answer.


On your other points, I don't know about the 10k-15k change, but I believe that raising the repayment threshold was always an option to ensure that student loans didn't automatically become stealthily less progressive (ie, inflation puts up salaries, but the repayment point stays the same and catches more people - classic stealth-tax approach).

As for the pre-1998 loans, you can expect some schadenfreude if those on the pre-1998 schemes you know pass the c.£27,000 per year earnings threshold. Once that happens, they then have to pay off 1/60th of the loan per month. Irrespective of how large or small it is.

So if its a sizeable loan then 'ouch!' Which, funnily enough, is why that system got canned in 1998.

tyler80

Have to admit I'm not 100% sure on the answer to the first question myself :-)

The interest rate is based on either the retail price index or the bank of england base rate plus 1% depending on which is lower

Not entirely sure whether this means

a) if base rate is lower than rpi the interest rate is base rate plus 1%

or

b) if base rate plus 1 % is lower than rpi the interest rate is base rate plus 1%

and perhaps my second question should have been worded as "His student loan is effectively not increasing in real terms, true or false?"

I don't know about the 10k-15k change, but I believe that raising the repayment threshold was always an option to ensure that student loans didn't automatically become stealthily less progressive (ie, inflation puts up salaries, but the repayment point stays the same and catches more people - classic stealth-tax approach).

It would make sense then to increase the repayment threshold for existing loan holders from 15k to 21k to be in line with the new repayment threshold but it doesn't seem that will be the case. It'd be hard to argue that student loans haven't become less progressive whilst setting the repayment threshold for future students 6 grand higher.

wozearly

tyler80 wrote: »

Have to admit I'm not 100% sure on the answer to the first question myself :-)

Actually, my response to question 1 was completely wrong. It should be the lower of the two figures (RPI or BoE base rate +1%), not the higher. So the answer is 4.3%, not 4.5% - RPI would be used in that example.

tyler80 wrote: »

and perhaps my second question should have been worded as "His student loan is effectively not increasing in real terms, true or false?"

If its a real terms question then provided the loan is going up at the same rate as RPI inflation then it remains the same in real terms - information that wasn't clear in the question as the RPI was never stated.

To be honest, its not the best way to look at the student loan though. The more pertinent point is whether or not the amount David will ultimately repay is changing in real terms - and we don't have enough information to answer that, as its salary and time dependent.

If David is earning above the repayment threshold, then his salary freeze will mean that the loan owed is growing faster in real terms than his payments against it, which means he'll pay more as a result - assuming that he will pay off the loan in full before the expiry period. If he won't, the headline figure of the loan is irrelevant.

This is a concept that's all the more critical under the new approach...and is what leads to so many counterintuitive assumptions because, unlike commercial loans, student loans are written off at a certain point in time. People aren't used to thinking through the effect that has in the majority of cases, and so focus more attention than is appropriate on the headline figures.

So if David is earning under the repayment threshold, and is unlikely to cross it, the interest rate on the loan is immaterial. Equally, if he's going to hit the expiry point before paying it off at the current rate then further increases in the amount owed are immaterial*. But as this could change based on circumstances over time, its impossible to know what the true situation will be in the future.


*NB. Only true of the post-1998 system and the new one. It would make a difference to pre-1998 loans because these repayments are linked to the loan amount rather than salary. Gah! The complexity is making my head hurt.

tyler80 wrote: »

It would make sense then to increase the repayment threshold for existing loan holders from 15k to 21k to be in line with the new repayment threshold but it doesn't seem that will be the case. It'd be hard to argue that student loans haven't become less progressive whilst setting the repayment threshold for future students 6 grand higher.

Well, the most sensible thing would have been to change the repayment threshold with RPI each year, positive or negative, to keep it in the same relative position as when it started. Or peg it to ONS salary surveys, so the threshold is set at the lowest point where at least 10% (or whatever) of people wouldn't have to make any repayments.

...but neither of those options were chosen. So existing student loans have, over time, become less progressive as the thresholds don't regularly or reliably take inflation into account as far as I'm aware. But this is essentially no different to other forms of stealth tax rises where fixed money thresholds don't automatically change with inflation on a regular basis (e.g. income tax, stamp duty).

wozearly

On a side-note, based on all the points above and in the other threads on student loans, I'd just like to point out just how wretchedly complicated student loan financing is...