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

Ed-1

Baxter100 said:

Using this student loan calculator - https://www.studentcalc.co.uk/ -  someone borrowing £27,000 for uni, immediately starting on a £24,000 salary and retiring on a £45,000 salary, with an annual average interest rate of 6.7% would end up still owing after 30 years....

£270,000

Assuming 500,000 students a year all owed something similar, that would be total of £135 billion a year being written off. Every year.

Am I missing something? This is insane!

What matters is the net present value of the write offs. High earners are paying a substantially above inflation interest rate and clearing the loan so those extra repayments go some way to paying for write offs of lower earners.

Add on maintenance loans and the nominal value of write offs is even higher.

koru

Baxter100 said:

Is it 100% guaranteed that these loans will be written off in 30 years time?

AFAIK, any government over this period could, if it wished, change any of the terms, including when, or even if, the loans are written off. 

Baxter100

Ed-1 said:

Baxter100 said:

Using this student loan calculator - https://www.studentcalc.co.uk/ -  someone borrowing £27,000 for uni, immediately starting on a £24,000 salary and retiring on a £45,000 salary, with an annual average interest rate of 6.7% would end up still owing after 30 years....

£270,000

Assuming 500,000 students a year all owed something similar, that would be total of £135 billion a year being written off. Every year.

Am I missing something? This is insane!

What matters is the net present value of the write offs. High earners are paying a substantially above inflation interest rate and clearing the loan so those extra repayments go some way to paying for write offs of lower earners.

Add on maintenance loans and the nominal value of write offs is even higher.

Based on my quick sums, a student with £40,000 loan debt would have to come out of University immediately earn a salary of £50,000 a year just for their debt to stay at the same level. Earn anything less than £50,000 and your total debt amount goes up as the interest amount outweighs the annual payments.

Out of the half a million kids going to University how many earn over £50,000 immediately? 1%? 5%? Whatever it is, it's really quite small. Nowhere near enough to offset all the lower earners.

If the interest rises to 12% later this year as seems likely then the minimum salary needed to start paying off the debt would be £90,000 a year!

I think I'm right in saying the government expects 50% of students to settle their loan in full. I suspect the real number will be closer to 0.5%.

Ed-1

Baxter100 said:

Ed-1 said:

Baxter100 said:

Using this student loan calculator - https://www.studentcalc.co.uk/ -  someone borrowing £27,000 for uni, immediately starting on a £24,000 salary and retiring on a £45,000 salary, with an annual average interest rate of 6.7% would end up still owing after 30 years....

£270,000

Assuming 500,000 students a year all owed something similar, that would be total of £135 billion a year being written off. Every year.

Am I missing something? This is insane!

What matters is the net present value of the write offs. High earners are paying a substantially above inflation interest rate and clearing the loan so those extra repayments go some way to paying for write offs of lower earners.

Add on maintenance loans and the nominal value of write offs is even higher.

Nowhere near enough to offset all the lower earners.

The costs of write offs aren't entirely paid for by higher earnings by any stretch. There is a taxpayer cost and this is reflected in the RAB charge. This is currently 44% for Plan 2 loans:

https://www.gov.uk/government/publications/higher-education-reform-equality-impact-assessment

That means for every £1 lent out the taxpayer has to write off 44p in net present value.

The proportion repaying loans in full is forecast to be 50% under the new Plan 5 (post-2023) system.

Baxter100

"The proportion repaying loans in full is forecast to be 50% under the new Plan 5 (post-2023) system. "

Do you have the calculations for this?

silvercar

A few years of inflation and ex-students will have had pay rises and be paying back more than originally thought.

AggrievedGraduate

Interest rates for high-earning graduates on Plan 2 -what to do?

The below was originally meant to be a request for advice about paying off my student debt but I seem to have answered my own questions as I was typing. This has turned into more of a shell/base for a letter to MPs/ policymakers (I will remove some of the ramble and my personal circumstances). Thoughts and corrections to anything I might have misunderstood, missed or could phrase better are most welcome and advice on steps to take this further would be much appreciated (as would getting this to Martin Lewis and Clare Casalis who I am interested to hear thoughts from).

I am a recent graduate who has just taken a bit of time to look more deeply into my own student debt situation and am astounded with what I have found….

I was thrilled to see the post about Santander’s Easy-Access savings account paying a rate of 2.75%, a great place to park my mortgage deposit funds whilst I wait for equity markets to settle down or the miracle of being able to get a large enough mortgage to be able to purchase a flat in London to come to light – albeit still at a significant negative real return.

Remembering the days of study for a tax and regulation exam I took at the start of my grad scheme, I revisited the tax rates on interest in the UK and was saddened to see that the personal savings allowance for a higher rate tax payer is just £500…sigh…yet another avenue that the tax system will be targeting me through (terrible that an unused personal CGT allowance cannot be redistributed to this) but so be it.

This then triggered me to turn my attention to a deduction off my payslip that I had tried my best to ignore until now – my dreaded student loan. Having started university in 2017 on a 3 year course I am on the Plan 2 repayment plan. A frankly ludicrous RPI+3% inflation rate for the highest earners (a group which I am “un”lucky to have been a part of since I started paying off my student loan) which is paid back by contributing 9% of my earnings over £27,288. You can imagine my

surprise when I discovered that I was keeping less than half of my annual bonus with my marginal “tax” rate of 52.25% (40% income, 3.25% NI and 9% student loan), alas, at least I can show some gratitude to the current government for reversing the latest NI raise.

The announcement of the interest rate cap of 6.3% on student loans was welcome but necessary – latest RPI figures (Aug 2022) would have resulted in a rate of 17.8% given the additional 3% higher earners are subject to. The question is, where has that figure come from and is the cap likely to be maintained beyond its current expiration of August 2023? Our previous Secretary of State for Education and Minister of State for Higher and Further Education came to the revelation that graduates should not “repay more than they borrowed in real terms” and introduced a rate of RPI+0% for the upcoming plan 5 loans (students starting courses from the 23/24 academic year). Just a reminder that RPI lost its status as a National Statistic in 2013 and regarded as “a very poor measure of inflation” (Office for National Statistics). The current cap on the interest rate does make this irrelevant as its is below both CPI and RPI (9.9% and 14.8% respectively in Aug 2022) but it is baffling that this is still being used as a measure 20 years after the Bank of England switched from it as an inflation measure – and apparently it is to be used until at least 2063 when the first of the loans for Plan 5 graduates will start to be written off.

Back to my personal situation (and for graduates who are also on plan 2), where was the idea that paying an above-inflation interest rate for education is unfair when I started university? CPI did not exceed 3.1% through the entirety of my time at university and was at just 0.2% when I left. The lowest rate of interest I paid on my student loan whilst studying was 5.4% and it peaked at 6.3% for a year’s worth of payments in 2018-19. I have recently hit the mark of £10,000 in interest applied to my student loan balance despite having only started university 5 years ago and been working for just two of those – what hurts a bit deeper is that this will continue to compound for many more years to come unless I take action.

This figure is likely to be even higher for those who completed 4 year courses or who received the London maintenance loan amounts and started on a high paying job. Should there be a retrospective removal of these excessive interest charges? A call must be made to policy makers to act more fairly; especially as most enjoyed free university education (or minimal fees) with the rise to £9k a year only affecting those who started their further education after 2012. It is also interesting to note that

fee paying graduates prior to 2011 pay an interest rate that is the lower of RPI and the base rate+1% meaning that they are currently only paying 2.75% (and were paying much less for the past few years as the base rate remained close to 0%) – it’s surprising that this was changed as this is a rate that the government can borrow at. One possible suggestion is a return to this method of calculating rates.

Why does this matter? The majority of students are not going to pay the debt back anyway… the Institute for Fiscal Studies estimates that 83% of English student loan payers will not clear their debt before it is written off. So what of the 17%...? Is it fair that very little consideration is given to this problem just because it does not affect the majority of student loan payers? For those who argue that the highest earning graduates should be expected to bear the brunt of the debt forgiveness, you may have a point but unfortunately the current policy does not solve the issue. The extra interest payments do little to cover the shortfall and the majority of the burden of forgiven debt will fall to the entire population in the future. The very highest earners will actually not be contributing very much at all as they will simply repay the debt early; avoiding the additional interest all together. But even if not,

they will be contributing far greater proportionally to the problem through our progressive income tax system anyway. Those who will be affected the most will be the “low” high earners who do not make enough to afford early additional student loan contributions or those whose income steps up dramatically later on in their careers once they have already been subject to the interest (our hard-working underpaid junior doctors for example). Is this fair?

And now my current thoughts on what to do next personally… a Covid disrupted start to my career and my fortunate position to be able to live with my parents rent free has enabled me to amass significant savings that I could use to completely pay off my student loan. Do I do it? Not for now… A decision that has played on my mind but depends on a number of factors. In theory, an inflation plus 3% return is hard to achieve (especially when the higher RPI figure is used) and almost impossible to

do in the current period of elevated inflation - so I should definitely look to pay it off as soon as possible. The caveat to this is, firstly, I am betting on myself remaining a higher earner for the remainder of my career – a career change or an inability to work could leave me significantly out of pocket as I wouldn’t have had to pay back the loans in the 30 year period (a hopefully unlikely scenario but an important one to consider nonetheless!). A far more significant concern is that the government can alter the terms of the loan at any point in time and it is likely there will be very little thought given to those who have already paid off their loans. Those who had paid off their student loans prior to March 2020 will not be eligible for Biden’s $10k loan forgiveness program is a warning for those considering paying off their debt. With university fees a constant political debate (thinking back to Corbyn’s promises of no university fees in 2017), there is no guarantee that retrospective action will not take place and those

who are encumbered with significant debt are far more likely to be considered than those who have paid it off. With the direction policy is heading with Plan 5 loans, it is likely changes to the interest rates will come up for debate. Policymakers understand the rates are currently unfair and I would be interested to know why a return to a base rate plus measure cannot return for past and future university students? I would be very happy to keep hold of low interest student debt that does not

affect my credit score for the foreseeable future. Finally the opportunity cost, my savings have been earmarked for a house deposit and using them to pay off the debt would put me a couple of years back on my journey to get on the property ladder in London – a task that is proving monumental for recent graduates but that is a discussion for another day.

The ability for the terms of student debt to be changed at any point in the future makes it impossible to make a decision about the future! I am accepting of the fact that rates were decided at a time where both the base rate and inflation were low and didn't seem too cumbersome on graduates. But with the inflation environment we are currently in, action more than the current cap needs to be taken or at least some clarity and guarantees over the future interest rates and university fee policy so that sound financial decisions can be made. 

Solutions:

 The removal of an inflation-beating interest rate for students from 2023 was a step in the

right direction but what of those who have already paid those rates and will continue to do

so in the future if the cap is removed going forward? Clarity is required.

 The continued use of RPI does not make sense. CPI is currently better, the base rate better

for the long term or the lower of the two better still.

 Guarantees over future policy. Those who have paid off their debt should be included in any

changes to rates/fees if retrospective action is taken for the unfair system we have

experienced over the last few years.

silvercar

I don’t think the current government can afford to right off student loans. Loans have been in place for so long, that any forgiveness programme would be considered unfair to those that were put off studying by the thought of the loan. 

As to your personal circumstances, if you strive to be a London homeowner, I would be saving all you can for a deposit. With a significant deposit you may well fall into a lower loan to value band for a mortgage and enjoy better rates. 

AggrievedGraduate

Thanks for the advice. Although I do think that it is ridiculous that there are a number graduates (the 17%) chasing rates of 2.75% when they are sitting on a massive pile of debt at 6.3% interest. 

But this should be considered in the London rent/ buy debate… With mortgage rates at what they are and central London flat prices remaining fairly stagnant over time it’s looking like it’s moving back towards the former. Buying a two bed and letting out the second room (with the £7.5k tax free lodgers allowance) is the only hope of getting a meaningful return but when considering that you are effectively paying 6.3% in student loan interest this goes to almost nothing.

Back of the envelope calculation.
5% (low considering rates have surpassed 6%) on a £400k mortgage is £20k p.a

Savings on rent for one room + letting out a second room
£12k + £7.5k = £19.5k

6.3 % Interest on £50k of student debt is £3.15k (which was taken up by your deposit).

You’re on -£3.65k p.a assuming that you have full occupancy of the second room.
Will need to be banking on house prices increasing to make any sort of return - is it worth all the hassle and uncertainty? An empty room for a few months could put you really in the red. 

silvercar

AggrievedGraduate said:

Thanks for the advice. Although I do think that it is ridiculous that there are a number graduates (the 17%) chasing rates of 2.75% when they are sitting on a massive pile of debt at 6.3% interest. 

But this should be considered in the London rent/ buy debate… With mortgage rates at what they are and central London flat prices remaining fairly stagnant over time it’s looking like it’s moving back towards the former. Buying a two bed and letting out the second room (with the £7.5k tax free lodgers allowance) is the only hope of getting a meaningful return but when considering that you are effectively paying 6.3% in student loan interest this goes to almost nothing.

Back of the envelope calculation.
5% (low considering rates have surpassed 6%) on a £400k mortgage is £20k p.a

Savings on rent for one room + letting out a second room
£12k + £7.5k = £19.5k

6.3 % Interest on £50k of student debt is £3.15k (which was taken up by your deposit).

You’re on -£3.65k p.a assuming that you have full occupancy of the second room.
Will need to be banking on house prices increasing to make any sort of return - is it worth all the hassle and uncertainty? An empty room for a few months could put you really in the red. 

You need to factor in whether you want to have your own place and choose your own lodger or rent somewhere else and pay someone else’s mortgage. It isn’t all about the money.

On your calculations, if the saving on rent is 12k, then the rental income is more than 7.5k. The tax free allowance is 7.5k and you pay your marginal rate of tax on the remainder. So the income from the lodger is at least 10k.