'Does the Adam Smith Institute understand how student loans work? ' blog discussion

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.




Please click 'post reply' to discuss below.
«13

Replies

  • VT82VT82 Forumite
    1.1K Posts
    Tenth Anniversary 1,000 Posts Combo Breaker
    ✭✭✭
    What a joke. Even though they seem to loosely grasp that overpaying will probably just end up being throwing money away, they go on to suggest you should do it anyway to help Government and taxpayers out? So the ASI really thinks the Government is a charity that needs people's money more than actual charities or the graduates themselves do?
  • poppy10_2poppy10_2 Forumite
    6.5K Posts
    Part of the Furniture 1,000 Posts Name Dropper
    ✭✭✭✭
    Now a more typical example
    Even a graduate on a starting salary (£25,000) which rises at 2% above inflation for 30 years, who has taken the full £9,000 tuition fee and maintenance loan of £5,500 would have accrued a total borrowing of around £43,500.
    According to www.studentfinancecalc.com, their repayment over the 30 years before the debt is written off (at todays prices) would be £24,940 – far less than their original borrowing.
    Bit cynical to cherry-pick figures to suit your pro-government point of view.

    Here's a "more typical example" of my own:
    A graduate on a starting salary of £24,000, who has taken out the full £9000 tuition fee loan and a £3000 maintenance loan for a three year course will have borrowed £36,000. But they will be forced to repay a staggering £110,420 (or £60,340 in today's money) - much more than they borrowed, and a huge burden on anyone wanting to plan for their long-term future.
    This is assuming average earnings rise broadly in line with RPI, while graduate earnings rise by 4% more than this (graduates typically have large bumps as they climb the career ladder in the early years and a more static income later - I'm earning more than double what I earned when I first graduated).

    The student loan calculator is rigged to assume low salary growth for graduates, of only 1% higher than average earning growth. Changing this default value even slightly leads to massive increases in the amount you have to repay. Sure, if your salary starts low and remains low then you won't have to repay as much, but then what is the point of going to university if this is the career path you are hoping for?
    poppy10
  • jamesdjamesd Forumite
    25.7K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    There is a shared risk and benefit here, some to the student, some to society, and society has at present taken the view that there is a benefit in encouraging people to go to university even if their jobs then do not provide sufficient financial reward to repay the loan. For the student such a system substantially reduces the risk and is essential to encourage those from less well of backgrounds and try to encourage social mobility.

    I think it's entirely fair for the Adam Smith Institute and Mr. Buffett to invite people to make additional contributions, as a matter of choice. They can also tell people to buy National Lottery tickets and Premium Bonds if they want to.

    poppy10, the way the repayment system is structured prevents the loan repayments from being a huge burden on long term planning so the example you've quoted is bogus.

    The point of going to university and having a variable repayment level is that the market doesn't necessarily financially reward jobs that society considers worthwhile. The loan repayment structure helps to address that mismatch so that those who do end up with high financial rewards will end up repaying more and may end up clearing the loan.

    Even for people who will eventually repay it may well make sense not to do any early repaying. That's because there is a risk of unemployment or inability to work that could cause any overpayments to be wasted spending for the individual. One possible optimal time to overpay is when enough capital to live for life at a suitably living standard has been accumulated. At that point the risk of overpaying is much reduced and it can make more sense.

    While no system is perfect the graduated repayment approach is a pretty good one.
  • arisaris Forumite
    338 Posts
    Part of the Furniture 100 Posts
    ✭✭
    Ever stop to think that some people don't want to be social leeches and want to pay their debts rather than just let them lapse? If you are going to be a high earner, I certainly would not want a debt around my neck for 30 years knowing full well I could pay it off much quicker.
  • JimmyTheWigJimmyTheWig Forumite
    12.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭
    Now a more typical example
    Even a graduate on a starting salary (£25,000) which rises at 2% above inflation for 30 years
    Martin,

    I've said this before and I'll say it again now.

    I don't believe that this is a typical example.

    I believe that a typical graduate salary will rise faster than 2% above inflation.


    Can you get some decent figures to base your typical examples on, please, Martin? Surely you or someone in your team is able to do this.

    The Student Loans Company, on receipt of an application to repay early, should be mandated to produce a quote on the impact to the student. Based on their current salary it should be signed and returned before the money is credited to the account.
    I think that this is a good idea. But I hope, I bloomin' well hope, that if it is implimented it uses realistic assumptions rather than what is classed as "typical" in the article!
  • edited 2 March 2012 at 9:57AM
    MSE_MartinMSE_Martin MoneySaving Expert
    8.3K Posts
    ✭✭✭✭
    edited 2 March 2012 at 9:57AM
    poppy10 wrote: »
    Bit cynical to cherry-pick figures to suit your pro-government point of view.

    Here's a "more typical example" of my own:
    This is assuming average earnings rise broadly in line with RPI, while graduate earnings rise by 4% more than this (graduates typically have large bumps as they climb the career ladder in the early years and a more static income later - I'm earning more than double what I earned when I first graduated).

    The student loan calculator is rigged to assume low salary growth for graduates, of only 1% higher than average earning growth. Changing this default value even slightly leads to massive increases in the amount you have to repay. Sure, if your salary starts low and remains low then you won't have to repay as much, but then what is the point of going to university if this is the career path you are hoping for?

    A number of points on this

    1. Not sure why you think I have a pro-government position. I have very often stated I disagree with the changes. I head up the INDEPENDENT TASKFORCE - which is non-govt funded who's board includes the National Union of Students, the Universities, UCAS, student money advisers - on communicating how the system works.

    2. The reason I picked that example wasn't to cherry pick a govt point of view it was by definition to show that in some circumstances you can be earning above the repayment threshold and its still not worth repaying early. Therefore it had to be an example that shows that - and this is a plausible scenario - whether its typical or not is irrelevant for the content of this blog.

    The blog only stated it was more typical not that it was an average. Yet just because it really doesn't matter I've now changed the phrasing and the assumptions to another example which makes the same point which is that SOME STUDENTS won't gain from overpaying.

    3. I take offense that you say the student finance calc is rigged - it is the ONLY calc of its type out there that allows you to change assumptions. The reason you can see the difference changing that stat makes is because the calculator gives you that option! I wanted that to be a part of the calc when we build it so people could see different scenarios.

    4. We assume a graduate salary growth of RPI + 2%, I accept that for some this is stronger in the early part of their career - though it tapers off towards the later part. Yet also rememebr teh calc works on the assumption you are in work at those levels for the entire 30 years - no career breaks, time off, change of direction, periods of unemployment. So the lower RPI assessment helps incorporate that.


    Martin
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.
    Don't miss out on urgent MoneySaving, get my weekly e-mail at www.moneysavingexpert.com/tips.
    Debt-Free Wannabee Official Nerd Club: (Honorary) Members number 000
  • edited 2 March 2012 at 9:59AM
    iberianiberian Forumite
    4 Posts
    edited 2 March 2012 at 9:59AM
    Does the outstanding student loan affect ability to get a mortgage? If in a position to be contemplating taking on a mortgage would it be better to try to reduce the outstanding student loan?

    To a very minor extent, but you'd be far better off to put the money in savings to reduce the deposit needed - the gain from that would massively outstrip any student loan impact see www.moneysavingexpert.com/students2012 for more.
  • JimmyTheWigJimmyTheWig Forumite
    12.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭
    iberian wrote: »
    Does the outstanding student loan affect ability to get a mortgage? If in a position to be contemplating taking on a mortgage would it be better to try to reduce the outstanding student loan?
    I believe that your repayments will affect your ability to get a mortgage, but the size of the loan itself won't.
    Given that the size of the loan only affects on when you will stop paying, not how much you pay, reducing the balance will only help with getting a mortgage if it is reduced to zero.
    To a very minor extent, but you'd be far better off to put the money in savings to reduce the deposit needed - the gain from that would massively outstrip any student loan impact see www.moneysavingexpert.com/students2012 for more.
    I agree.
  • JimmyTheWigJimmyTheWig Forumite
    12.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭
    MSE_Martin wrote: »
    SOME STUDENTS won't gain from overpaying.
    Absolutely. I think the change away from "typical" in the blog is a welcome one.
    We assume a graduate salary growth of RPI + 2%, I accept that for some this is stronger in the early part of their career - though it tapers off towards the later part. Yet also rememebr teh calc works on the assumption you are in work at those levels for the entire 30 years - no career breaks, time off, change of direction, periods of unemployment. So the lower RPI assessment helps incorporate that.
    Are there really no figures available from which you can build a typical or average scenario?

    My first three annual increases (within the same company, no promotions) after graduating were around 17% a year. Inflation was running at around 3% at the time. I have no idea if this is typical or not. I believe my starting salary was competitive.
    Obviously since then things have slowed down somewhat, but sharp increases like this means you hit repayment (and hit further into repayment) much quicker than you would with steady increases (even with a career break).

    Because it is the only real figures I have to go on, I see myself as typical. I have never seen any of your examples look anything like my pay curve. They always (with the exception of unreasonably high starting salaries, which would generally be ignored as people don't expect to start that high) illustrate lower repayments than what I would have repaid under the same scheme.
    That is why, I think, you are seen as being pro-government over this.

    I think that finding a typical or average pay curve would be key to making this unbiassed.

    Can anyone (Martin?) find the average current salary of a graduate 30 years after graduation? If we had that then we could take off, say, 2% a year for 30 years (i.e. divide by 1.81) to get a starting salary in today's money then inflate that in the calculator by RPI+2%. That would come out repaying slightly more than the average as it wouldn't take into account the lower pay in the first few years. But I think it is more important to get an accurate picture of the last 25 years than it is to get the accurate picture of the first 5 years.
  • tyllwydtyllwyd Forumite
    5.5K Posts
    ✭✭✭✭
    jamesd wrote: »
    .... Even for people who will eventually repay it may well make sense not to do any early repaying. That's because there is a risk of unemployment or inability to work that could cause any overpayments to be wasted spending for the individual. One possible optimal time to overpay is when enough capital to live for life at a suitably living standard has been accumulated. At that point the risk of overpaying is much reduced and it can make more sense. ...

    I'm not convinced that overpaying when you are financially comfortable is going to make a lot of differnce because very probably you will be reasonably far into the 30 year repayment period by then - by that time, either the interest has accumulated so much that you are chasing an end point that you are never going to reach, or if you have been on a high salary for a while, your repayments are paying off your loan at a faster rate, so the impact of the interest won't be so great.

    To me, either you take the gamble of paying everything up front and keep out of the system completely, or you accept that you are tied in for 30 years.
This discussion has been closed.
Latest MSE News and Guides

54 ways to ‘DIY it’

According to the MSE Forum

MSE Team Blog

£10 Christmas bonus

For benefits recipients

MSE News

Lidl '£10 off £40 spend' voucher

Via Metro or Daily Mail. Excludes NI

MSE Deals