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Guide discussion: Should I repay my post-2012 student loan?

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Guide discussion: Should I repay my post-2012 student loan?

edited 30 November -1 at 1:00AM in Student Money Saving
75 replies 32.1K views
MSE_RosieMSE_Rosie Former MSE
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edited 30 November -1 at 1:00AM in Student Money Saving
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  • One-EyeOne-Eye Forumite
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    It is a tax with very regressive features to look after the ultra rich.

    eg. Two students graduate with loans of £50,000. One takes a job with a salary of £45,000 and ends up paying about £150,000. The other takes a job with a salary of £100,000 and decides to wipe out the loan over 3 years and ends up paying less than £55,000.

    The only good point about the current system is that graduates who move abroad can be pursued for payment as it is set up as a contract.

    The labour party under Miliband/Balls totally failed to understand the Student Loans system by proposing to reduce fees to £6,000/year without realising this would only benefit the richest 50% of graduates - the poorer 50% would pay exactly the same over 30 years. Doubling tuition fees and increasing the interest rates only hits the wealthiest, so I am surprised that Corbyn/McDonnell haven't gone for this rather than the very expensive, possibly unafordable option of promising to abolish tuition fees and "think about" clearing historic debts.
  • edited 18 July 2017 at 6:27PM
    pjalapjala Forumite
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    edited 18 July 2017 at 6:27PM
    In Martins q&a it mentions the self employed need to declare interest earned on savings so that 9% of this is also paid to the SLC. But, is this also true for ISA interest? If so, then graduates will be the only sector of the population who pay a "tax" on ISA savings. What about the LISA? But to be honest, even if not, then a 9% tax on all savings interest when others are paying nothing is ridiculous.

    This, for me, adds weight to the idea that student loans are virtually separate to the normal financial system obeyed by paye and business - i.e. tax - and it is highly regressive taxation. If it is a tax where the rich pay more, then we have a TAX system that does that. I am thinking it really needs to be properly addressed, and mistakes learned from this, without causing untold damage to all our future scientists, doctors, academics, etc. etc. Plus undermining the tax system in their minds.
  • The long and short of it all is that it's a graduate tax, and that's fair enough if it is transparent and fairly and properly administered.

    However, it was decided to set up a monstrous bureaucracy which is none of these things. Most importantly it is unaccountable. Complaints are not properly handled and there is no way of challenging its decisions and actions. To my mind either the whole business of repayments should be handled by the Inland Revenue service, which would also presumably have the benefit of reducing costs substantially, or the Student Loan Company should become regulated by the FSA, like all other financial services of any size. At present the only way of getting any redress is to appeal to your MP, and we all know what a waste of time that is.
  • edited 21 July 2017 at 11:11AM
    korukoru Forumite
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    edited 21 July 2017 at 11:11AM
    One further point to add is that the length of the degree course influences the chance that the student will repay the loan in full. All other things being equal, students on 4 year degree courses will have loans 33% bigger than those on 3 year courses. A student taking the full maintenance loan could have a loan of £68k at the end of their course (plus 4 years of interest).

    [STRIKE]This will also mean they enter the job market a year older than those on 3 year courses, so the number of years til the loan is written off is one less.[/STRIKE] [Deleted, as Ed 1 has pointed out I'm wrong. The wider point stands, however.]

    However, I'm guessing 4 year courses tend to lead to higher paid jobs, so perhaps this means loan repayments will be bigger.
    koru
  • xJonnyxJonny Forumite
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    One-Eye wrote: »
    It is a tax with very regressive features to look after the ultra rich.

    eg. Two students graduate with loans of £50,000. One takes a job with a salary of £45,000 and ends up paying about £150,000. The other takes a job with a salary of £100,000 and decides to wipe out the loan over 3 years and ends up paying less than £55,000.

    I'm not entirely convinced by this argument. In reality, that 45k starting salary is probably itself earned by the top 1% and 20k-30k likely encompasses the vast majority of graduate level starting salaries. Moderately successful graduates are more likely to be in this dilemma of being unsure if overpaying will be beneficial, as Martin writes, and hence be paying close to max, ultimately actually paying their loan off at these headline interest rates.

    Conversely, think about those who go to university to study a "economically useless" degree with no career benefit, or who just party at university and get a bad degree, or even those who just struggle to find a good graduate level job and do a lower paid retail/admin job for example. Aren't there likely to be more of these than graduates who have a starting salary of 100k, who by your reasoning borrow 50k for 55k, pay it back almost straight away, and effectively have almost the same impact on the system as if they, as "ultra rich", did not take out a student loan and paid the 50k outright (which would actually be more sensible) ?
  • edited 19 July 2017 at 11:50AM
    korukoru Forumite
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    edited 19 July 2017 at 11:50AM
    What might be helpful is if MSE did an analysis to show how RPI +3% is likely to compare with alternative investments, over the 30 year life of the loan. If you have cash that you could use to pay off (or avoid taking out) a student loan, you can either "invest it" to reduce the interest on your student loan or invest it in, say, savings or equities (until such time as you "invest it" as a house deposit or, say, buying a car without a car loan).

    I think there's a good chance the 6.1% rate will be reduced before it hits, either because the Tories change it for political reasons, or because Labour gets in. But if it does go ahead then it is much higher than current savings rates and even than yields from most equities. But this is unusual, due to a surge in inflation caused mainly by the fall in the value of the pound, post referendum. Normally, higher inflation would be matched by higher interest rates on savings

    The student loan lasts for 30 years, so over the long term how does RPI compare with (a) the best buy 3 year savings rate and (b) the total return from equities?

    Actually, you can get a good indication of the answer from the Barclays Equity Gilt Study. (Discussed here: http://monevator.com/uk-historical-asset-class-returns/) Over the long term, equities (FTSE ALL Share index) have beaten inflation by an average of 5% per year, though the last 10 years this has been lower, at 2.3% pa. Barclays use RPI for inflation, so this matches the student loan measure of inflation.

    Therefore, investing spare cash in a FTSE tracker (in an ISA, to avoid tax), rather than using it to pay off (or avoid taking) a post 2012 student loan is likely to give a higher long term return than the worst case student loan interest, unless you think the last 10 years are the new norm for equity returns.

    If you do this investment in a LISA, you also get an extra 25% one-off boost to your returns.

    On the face of it, that study shows cash savings have underperformed inflation by 1.1% over the last 10 years, but longer term they beat RPI by around 1%. However, I understand Barclays use the "bog-standard" savings rate from Halifax or Nationwide. By shopping around for the best buys, you can usually beat these rates by 1 to 2%, so I would say that over the long term savings should earn RPI +2% to 3%. Again, you can boost this with a LISA. So, investing in a savings account should roughly match the worst case student loan interest, though of course as Martin points out the actual rate may be lower than RPI +3% and it may well end up being written off.
    koru
  • Ed-1Ed-1 Forumite
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    koru wrote: »
    This will also mean they enter the job market a year older than those on 3 year courses, so the number of years til the loan is written off is one less.

    No it's not. The loans for any given course enter repayment on 6th April after the student leaves the course. The loans for that course are cancelled on the 30th anniversary of the loan entering repayment.

    http://www.legislation.gov.uk/uksi/2012/1309/regulation/7/made
    koru wrote: »
    I think there's a good chance the 6.1% rate will be reduced before it hits, either because the Tories change it for political reasons, or because Labour gets in. But if it does go ahead then it is much higher than current savings rates and even than yields from most equities. But this is unusual, due to a surge in inflation caused mainly by the fall in the value of the pound, post referendum. Normally, higher inflation would be matched by higher interest rates on savings

    If the DfE are to change the formula for setting interest rates on post-2012 student loans this September they've got until tomorrow to change the law so it's highly unlikely that it will be changed this year. Any change would require the current regulations to be amended and the statutory instrument would have to be laid before the summer recess on 20th July for it to take effect in September.

    Under the current regulations the only alternative to setting interest on post-2012 loans using the RPI + 0-3% formula is to not set a rate at all. The law states: “If the Authority determines that post-2012 loans will bear interest…”

    http://www.legislation.gov.uk/uksi/2012/1309/regulation/10/made

    The rate on post-2012 student loans has already been higher than the scheduled 6.1% for September. It was 6.6% in 2012/13 and 6.3% the following year but the accumulated debt it was levied on was of course lower then due to those being the first two years of the post-2012 system and maintenance grants reducing the total debt accessible.

    It’s postgraduate loans where the biggest difference for most would be felt from a change to the RPI + 3% formula as this would benefit lower earners as well as higher earners due to the smaller loan balance.

    http://www.legislation.gov.uk/uksi/2016/606/regulation/31/made
  • cconccon Forumite
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    I am 48 and starting full time uni this year.
    I will be about 52 when I finish as I will do a sandwhich year.
    Will I continue to pay back the loan after I retire ?
    Thanks to anyone who knows
  • Ed-1Ed-1 Forumite
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    ccon wrote: »
    I am 48 and starting full time uni this year.
    I will be about 52 when I finish as I will do a sandwhich year.
    Will I continue to pay back the loan after I retire ?
    Thanks to anyone who knows

    You only pay back 9% of what you earn over the threshold. If you retire you don't earn over the threshold so do't repay.

    Pension income is exempt.
  • One of the things that has shocked me about my daughter's student loan is that the interest is charged monthly and then of course compounded. This means it spirals upward very fast. I don't know about anybody else but my ISAs don't work like that ( I wish they did!). I certainly didn't clock this when looking into the loan originally. I wonder if this is not a case of mis-selling? Just try asking the SLC what the real AER is.
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