'Don't pay your kids tuition fees upfront' Discussion Area

setmefree2

I'm guessing that the retrospective changes to 2012 Student Loans won't change MSE's position on paying tuition fees upfront.

elfreda69

I am not sure that this is correct.
Students pay 9% of their salary that is above 21k. So, if you earn 25k, you will only pay 9% of 4000, that is 360 PER YEAR.
I did some calculations and unbelievably, I think that most students will not repay back their full loan.
My example is this: an average student loan may be around 42k (27k for tuition and 15 for maintenance loan).

if a graduate has an average salary of 35k over 30 years, this means that they pay back £1260 per year. They have 30 years to pay back the debt. £1260 x 30 years = £37,800

koru

Beware. Scenario 3 in the article is a graduate who has high earnings and it concludes that avoiding having a loan leads to a "gain of £41,400". However, the apparent gain is just a one-sided picture, because it calculates the total loan payments over 30 years (in today's money), but it ignores the benefits you would be likely to get from keeping the cash.

The subsequent section about Safer Alternatives talks about these benefits, but I don't think it makes clear that in many cases it would mean that there's a net loss from paying upfront in Scenario 3. For instance, the article says:

"For many on low to even relatively high salaries, it'd be a waste of money to pay upfront. But for those on very high salaries, it'd be a big mistake not to."

The second sentence is only true if you assume a very pessimistic level of benefit from keeping the cash. For instance, in scenario 3, borrowing £51,600 for 30 years results in loan payments of £93,000 (stripping out inflation), but if the £51,600 is invested or used to reduce mortgage costs, it is likely to grow faster than inflation. To grow to £93k over 30 years it would only need to grow at an average real rate (ie, on top of inflation) of around 2%.

2% real growth should be easily achievable. For instance, Help to Buy ISAs are offering 4% interest, currently. It seems likely that LISAs will be similar. That's 3% real growth. Or, if you are willing to take a small risk, the UK stock market gives average real returns of 4%, over the long run (and 30 years is the long run). And from 2017, over 12 years the £51,600 could be moved into a LISA, adding £12k free from the government (on top of any interest/dividends).

And using the cash to give them a bigger deposit when they buy a house, the graduate would probably get a lower rate of mortgage interest on their whole mortgage. That's likely to mean mortgage interest savings that are a lot more than 2% (as a percentage of the £51,600 plus accumulated growth).

Je55ica21

Please help, I'm really confused. Just used the student finance calculator. I supposed my son would achieve £22,000 on leaving university and it automatically assumed a pay rise of 2%. It came up with a salary of over £95000 in 30 years time. I understand how this happened. However, it also said that assuming this trajectory, my son will only have paid back £22,000 of his loan. I don't understand this. If he is earning £95,000 and he pays 9% on everything he earns above £21,000 then surely he will pay over £7000 in that final year alone. How come the calculator only says that he will pay back £22,000? Any simple explanations gratefully received please. Many thanks in advance.

Ed-1

Je55ica21 wrote: »

Please help, I'm really confused. Just used the student finance calculator. I supposed my son would achieve £22,000 on leaving university and it automatically assumed a pay rise of 2%. It came up with a salary of over £95000 in 30 years time. I understand how this happened. However, it also said that assuming this trajectory, my son will only have paid back £22,000 of his loan. I don't understand this. If he is earning £95,000 and he pays 9% on everything he earns above £21,000 then surely he will pay over £7000 in that final year alone. How come the calculator only says that he will pay back £22,000? Any simple explanations gratefully received please. Many thanks in advance.

I don't know which calculator you're using but any calculator can only provide highly speculative estimates as it depends on what happens to policy in the future such as the level of the repayment threshold. The calculator assumes that it won't stay at £21,000 forever, which it won't. It will increase eventually in some way or another. The Government will review it in April 2021.

The other thing is that it may be £22,000 is net present value terms, i.e. paying back £7,000 in 30 years may well be the same as paying back £3,500 today as inflation over the next 30 years means £3,500 today is worth the same as £7,000 in 30 years.

So £22,000 is a speculative estimate of the money paid back in net present value terms. In actual cash terms over the years, it may be more like £60,000.

Je55ica21

It makes me very nervous but, despite all the advice, we are seriously considering paying upfront. I've looked into it more and the MSE calculator is based on the threshold being raised by RPI+1% from 2021. However, like the rest of the calculator, this is purely speculative. The government has a very poor track record on this so far and I don't trust them at all. Although on the surface it looks as though the loan is good value, with the interest rate rising to 6.1% in September, my son would be faced with the prospect of beginning his adult life watching his debt rise by around £5000 in the first five years. Financially and psychologically, it's a very poor way to begin your financial independence.

Because the rate will be so high and the debt will grow so quickly we can't even hedge our bets and wait to see what his starting salary is, then pull out of the loan. In that time, the loan will already of have cost £thousands. It seems that once you're in, you're stuck with it.

I have to say I'm disappointed with the scheme, which seems to offer no protection or guarantees to students and it offers no incentive to progress through the career ladder. What guarantees would I like?

How much will the threshold rise by and when will it go up?
Will the loan always be wiped after 30 years or, in light of SLC selling off these loans to private companies, is this period likely to be extended?

Without these questions being answered, how can any repayment predications come even close?

It may or may not cost more to pay upfront but at least my son will have the security of knowing that he's not going to be lumbered with all that uncertainty for the next 30 years!

Ed-1

Je55ica21 wrote: »

It makes me very nervous but, despite all the advice, we are seriously considering paying upfront. I've looked into it more and the MSE calculator is based on the threshold being raised by RPI+1% from 2021. However, like the rest of the calculator, this is purely speculative. The government has a very poor track record on this so far and I don't trust them at all. Although on the surface it looks as though the loan is good value, with the interest rate rising to 6.1% in September, my son would be faced with the prospect of beginning his adult life watching his debt rise by around £5000 in the first five years. Financially and psychologically, it's a very poor way to begin your financial independence.

Because the rate will be so high and the debt will grow so quickly we can't even hedge our bets and wait to see what his starting salary is, then pull out of the loan. In that time, the loan will already of have cost £thousands. It seems that once you're in, you're stuck with it.

I have to say I'm disappointed with the scheme, which seems to offer no protection or guarantees to students and it offers no incentive to progress through the career ladder. What guarantees would I like?

How much will the threshold rise by and when will it go up?
Will the loan always be wiped after 30 years or, in light of SLC selling off these loans to private companies, is this period likely to be extended?

Without these questions being answered, how can any repayment predications come even close?

It may or may not cost more to pay upfront but at least my son will have the security of knowing that he's not going to be lumbered with all that uncertainty for the next 30 years!

The 30 year cancellation date is set down in the regulations so it would need a future Government to amend the regulations to change this. A negative change to something already legislated for is unprecedented for student loans, although it is of course possible. A change to the cancellation date has only ever applied to new loans. So I wouldn't worry about that.

With the threshold, it's much more flexible at the moment as only the current threshold level of £21,000 has been legislated for. To change it needs a future Government to amend it and reducing it would be unprecedented. Raising the threshold has happened before for pre-2012 loans. The Government changed the threshold in April 2005 from £10,000 to £15,000.

Commitments/intentions on the threshold can change. The Government committed to increasing the threshold in April 2010 annually by inflation. They froze it at £15,000 when inflation was negative https://www.theyworkforyou.com/wrans/?id=2009-11-24b.301475.h&s but then didn't increase it until April 2012 when it started annually increasing by inflation.

Similarly the Government committed to increasing the new £21,000 threshold which they introduced for post-2012 loans originally from this year but then decided to freeze it until at least April 2021 as earnings hadn't grown anywhere near as fast as they expected between 2010 and 2015.

Personally, if I was a student starting out now, I'd take the maximum loan I could and do as many courses as I wanted to that I could get loans for. It's much better to think of these loans as 'free money', i.e. a grant, in exchange for an obligation to pay a graduate tax of X% above a threshold, which is currently 9% above £21,000 but may change in the future (as with all taxes).

You can actually avoid paying this tax/loan repayment altogether by taking multiple jobs that both pay below the threshold. The threshold applies to each individual employment in full so earning ££21,000 in 2 jobs (so £42,000 in total) means NIL repayments.

silvercar

You can actually avoid paying this tax/loan repayment altogether by taking multiple jobs that both pay below the threshold. The threshold applies to each individual employment in full so earning ££21,000 in 2 jobs (so £42,000 in total) means NIL repayments.

I understood that that would catch up with you, in the same way that hmrc will catch up with you and income tax would be due.

silvercar

Je55ica21 wrote: »

It makes me very nervous but, despite all the advice, we are seriously considering paying upfront. I've looked into it more and the MSE calculator is based on the threshold being raised by RPI+1% from 2021. However, like the rest of the calculator, this is purely speculative. The government has a very poor track record on this so far and I don't trust them at all. Although on the surface it looks as though the loan is good value, with the interest rate rising to 6.1% in September, my son would be faced with the prospect of beginning his adult life watching his debt rise by around £5000 in the first five years. Financially and psychologically, it's a very poor way to begin your financial independence.

Because the rate will be so high and the debt will grow so quickly we can't even hedge our bets and wait to see what his starting salary is, then pull out of the loan. In that time, the loan will already of have cost £thousands. It seems that once you're in, you're stuck with it.

I have to say I'm disappointed with the scheme, which seems to offer no protection or guarantees to students and it offers no incentive to progress through the career ladder. What guarantees would I like?

How much will the threshold rise by and when will it go up?
Will the loan always be wiped after 30 years or, in light of SLC selling off these loans to private companies, is this period likely to be extended?

Without these questions being answered, how can any repayment predications come even close?

It may or may not cost more to pay upfront but at least my son will have the security of knowing that he's not going to be lumbered with all that uncertainty for the next 30 years!

We had similar concerns, plus a feeling that we would like our kids to start adult life debt free.

Feeling the same worries that you clearly feel, we thought it better to wait until they actually finished uni and obtained a graduate first job before paying the debt off.

Ed-1

silvercar wrote: »

I understood that that would catch up with you, in the same way that hmrc will catch up with you and income tax would be due.

There's actually no obligation to make student loan repayments if you don't earn above the threshold for a particular employment (unless you are in self-assessment when it goes on the aggregate income for the whole year including other things such as savings interest above £2,000 etc.).

Student loan deductions are on national insurance contribution-able income rather than income tax-able income. For the former, thresholds apply per employment. For the latter, thresholds apply on total income, so for example you can only get the personal allowance once.

For those not in self-assessment or overseas, part 4 of the repayment regulations applies to PAYE deductions:

http://www.legislation.gov.uk/uksi/2009/470/regulation/44/made

The repayment deducted must be 9% of any earnings paid to, or provided to or for the benefit of, the borrower in respect of the employment which exceed the threshold specified in paragraph (2).

The position is made clear in the minutes of this consultation group meeting from September 2009:

http://webarchive.nationalarchives.gov.uk/20101006145436/http://www.hmrc.gov.uk/consultations/esl-mins150909.htm

Borrowers with more than one employment
Media interest through the Money Saving expert (Martin Lewis) has highlighted an issue about the position of borrowers with two or more employments and each employment having a threshold of £15k. The current process that is followed conforms to the student loan Regulations.

EC asked for the group's view on this and the implications if the current system was changed to base student loan repayments on the total income. It was stressed that no solution is being considered at present.

This was discussed by the group and the following comments were noted:

• How the deductions would be made if the income from the employment was actually below the threshold.
• Changes would be needed to payroll software.
• The student loan process follows the National Insurance rules not the tax rues with personal allowances.
• This would be seen as a big change.
• Based on discussions around the new student tax code this would be very difficult in practice to implement.
• Although once the software was updated it should be easy to implement.
• Would need to change the student loan rules and regulations.
• Also need to consider employers who don't have a computerised payroll system.
• Danger of over-deductions which would mean the collection process was no longer wholly income contingent.
• Could make use of tax codes but this would have an impact on the PAYE system.
• Would need an end of year calculation if threshold allocated between employers.
• Difficult with short term employments
• Issue only happens in PAYE as deductions are made by the employer and not seen as an 'under-payment'. Doesn't happen with SA as this looks at the total income - this highlighted an inequity in the system which was recognised. (SA is based on total income and the amount to be deducted by employers is based on earnings for National Insurance purposes).
• Even if 'underpaid' the amount is still repayable, so it is only a case of deferring the payment.The normal 'write-off' rules still apply.
• The greater concern for the borrower is that they might over-repay and the solution would need to fix this issue as well as the under-repaying one.
• There is a similar issue for National Insurance and it hasn't been resolved.

EC thanked the group for their thoughts and advised that there is not a lot of information on how many borrowers might be in this category or why they have more than one job.

EC asked the group that if they had any further feedback to pass it on to Christine Rowse. It was also agreed to highlight this to Pete Jukes as the biggest impact may be on software.

If you look back at previous guides to terms and conditions such as 2005/06 http://webarchive.nationalarchives.gov.uk/20050302035856/http://www.dfes.gov.uk/studentsupport/uploads/ACF2FEE.pdf it makes this clear:

What happens if you have more than one job?
If your earnings in either job in any pay period are equivalent to more than £15,000 a year (£1,250 a month), your employer will make a loan deduction.
Each employer will give you credit for the full £15,000 threshold. So if you earn £17,000 a year in each of two separate jobs, each employer will deduct 9% of £2,000 (in other words £17,000 - £15,000 which is the threshold). Keeping your
employment records separate in this way protects your privacy and keeps the calculation of what you must repay straightforward for employers.

It also makes clear on page 5 that the only reason at that time that the loans weren't covered by the Consumer Credit Act was because they were classified as 'low cost' because they had a low interest cap of bank rate + 1% which exempted them.

The Government snuck a clause into the Sale of Student Loans Act 2008 that exempted student loans from the Consumer Credit Act full stop. This allowed the post-2012 loans to continue to be exempted despite massively increased interest.

You could say that Parliament were rather misled when that clause was approved as the Government of the time justified it on the basis that student loans were low cost and Parliament bought it despite the fact they were unlikely to remain low cost forever.