Student load repayment guide is confusing and possibly wrong

okay79

Does anyone else find the MSE student loan repayment guide unclear? No offence Martin (I am a big fan of yours) but I find this one hard to follow.

Also I am concerned that some of the logic might be wrong. In Irma Scholar's example (in step 2, section one), Martin talks about the interest rate being set at the rate of inflation, and wages going up with inflation.

The loan interest rate is set at the rate of inflation, which over the next ten years averages 4%. To help keep this example simple, Irma decides to repay it all at once in 10 years' time, having never repaid a penny before.

The 4% annual increases mean she must pay back £1,480. This sounds like it's expensive, yet everything else has gone up by the same proportion too; wages and the price of goods. So in ten years time £1,480 still buys Irma roughly the same 20 supermarket trips' worth of goods.

But apparently wages are falling behind inflation. Have a look at this article in the telegraph, especially this part:

A study by the Office for National Statistics showed three consecutive years of wage declines. Average earnings peaked in 2009, but since then, wage increases have been outstripped by inflation.

So... should I be concerned? Does this mean I should repay? I can't work it out.

agrinnall

I think it's almost entirely dependent on your personal situation, and as we know nothing about that it's difficult to say whether repaying is a good option or not. Are you currently earning enough to repay anything? What are your prospects of wage increases or promotions? Are you likely to be earning enough so that the repayments overtake the amount due before the debt is written off?

brendon

Student loans are a long term thing. Sometimes wages will be above inflation, sometimes they'll be below inflation. We all hope that, on average, they will track inflation.

TurnUpForTheBooks_2

brendon wrote: »

Student loans are a long term thing. Sometimes wages will be above inflation, sometimes they'll be below inflation. We all hope that, on average, they will track inflation.

Student Loans are a short term means of kicking the can down the road with regard to what should be being paid out of substantially increased tax revenues from the rich (but isn't) and which instead has actually been transferred onto the shoulders of those most incapable of shouldering it. They are also the least likely to understand it or even complain about it as they are too young to know better.

The student loan interest rate is manipulated at 300 basis points above an arbitrary measure of inflation which is officially discredited (RPI). That puts it at around 4x a typical current mortgage interest rate and 6x some of the best.

Average wages have not kept pace with any realistic measure of inflation for some twenty years. There is no effective protection for borrowers hoping that the successive governments will increase the payment thresholds to keep pace with inflation or that they will moderate interest rate hikes that could yet be hyperinflated given the state of our economies in the west.

Student Loans are an awful experiment already crippling households in USA. Even today we learned that a third tranche of Student Loan Company debt has been transferred to a private lender no-one but insiders have ever heard of, at a substantial discount with an invitation to the new owners to maximise the return on their investment as apprently they are well placed to do so (being private and unaccountable to voters as debt collectors that is).

We hope that within eighteen months scrapping the whole sorry mess because it is yet another major mis-selling scandal will have become a central election promise for one party at least.

agrinnall

TurnUpForTheBooks wrote: »

We hope that within eighteen months scrapping the whole sorry mess because it is yet another major mis-selling scandal will have become a central election promise for one party at least.

Who is this "we"? Your collected body of posts are starting to sound like the manifesto for a lunatic fringe party. I don't believe they have any place on boards aimed at money saving, and if you must continue to air your view on MSE then this is the appropriate rule for you:

Discussion Time is for discussion of current affairs and issues.

TurnUpForTheBooks_2

Sorry guys, but this is not your exclusive playground.

What I have posted is extremely pertinent to student moneysaving in the longer term so may I freely assume that whatever penance you choose to salve your consciences, your actual politics are more aligned with not contributing enough tax and continuing to dump on our students?

atypical

okay79 wrote: »

So... should I be concerned? Does this mean I should repay? I can't work it out.

The article confuses things by throwing wages into the mix. Ignore the wages point. The main point is that as the loan interest will never be more than the rate of inflation, what you owe will never increase in real terms. The £1,000 you could repay today is the same as the £1,040 you repay in a years time if inflation were at 4%.

The current interest rate is 1.5% (as the interest rate cannot be above BoE rate + 1%) whereas inflation is above this at 2.6% and has been for some time. It means the amount you owe is currently decreasing by 1.1% in real terms.

In any case, the interest rate is only one factor in why people shouldn't repay their loans. There's also the generous repayment terms and the chance the debt could be wiped.

TurnUpForTheBooks_2

atypical, when you say loan interest will never be greater than the rate of inflation, I take it you are confining your assertion to pre-2012 loans? If so, I think it would be helpful to make that clear - more and more students saddled with RPI+3% Repayment Plan 2 loans will be reading such threads and getting the wrong impression.

There is of course a question of whether RPI is a valid measure of inflation. As a valid index, it has now been discredited by the government I believe?

atypical

TurnUpForTheBooks wrote: »

atypical, when you say loan interest will never be greater than the rate of inflation, I take it you are confining your assertion to pre-2012 loans? If so, I think it would be helpful to make that clear - more and more students saddled with RPI+3% Repayment Plan 2 loans will be reading such threads and getting the wrong impression.

There is of course a question of whether RPI is a valid measure of inflation. As a valid index, it has now been discredited by the government I believe?

Thanks for the short and calm reply.

You're right. I was only talking about post-1998 and pre-2012 loans.

I think it's a bit unnecessary to go into differences in inflation measures, especially since the OP was confused already. You could also question whether someone's personal inflation rate will likely ever match national measures.

TurnUpForTheBooks_2

Well your short reply atypical does nothing to warn 2012-on starters that there is an important need for them to understand what RPI does to their loan balances day after day.

Don't you think that a public thread, on a public forum where misunderstandings abound, deserves a broader and more careful answer ?

The OP was confused by the MSE guide, not by any built in inadequacy in comprehension.

Why is it relevant to refer to an individual's personal inflation rate as if that might mitigate his or her fate with regard to a student loan ?

Student loan customers need certainty, not offers of further impossible variables with the inbuilt suggestion that you needn't worry about any of it and just let it wash over you like a warm bath!

atypical

TurnUpForTheBooks wrote: »

Well your short reply atypical does nothing to warn 2012-on starters that there is an important need for them to understand what RPI does to their loan balances day after day.

Don't you think that a public thread, on a public forum where misunderstandings abound, deserves a broader and more careful answer ?

Please do provide a broader and more careful answer, including an explanation of what RPI does to loan balances.