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

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?

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.

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!

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.