I am worried about student loans

Simplified projection for how my son's salary might change through the years - and how his debt would change until it is written off after 30 years.

Simplified – and optimistic – projection for how my son’s salary might change through the years – and how his debt would change until it is written off after 30 years. Note that even with this above average salary, the capital on his student loan is never repaid.

My eldest son is off to University this weekend to study Civil Engineering. Overall this is a good thing, but I am worried.

It will cost my wife and myself a lot of money: we estimate  about £27,000 over four years – but somehow we will afford it. But that is not why am worried.

My son will acquire a big debt: we estimate that he will end up with a  student loan of over £50,000. But that is not why I am worried either!

So why am I worried? I am worried for you, dear reader, because the terms of the loan are bonkers.

What’s the deal?

The deal is that for each of his years in higher education my son can borrow £9,000 for fees plus £3,608 for support. So after 4 years he ends up owing £50,440.,

He begins to repay this when he earns over £21,000 a year – a figure which is currently intended to track increases in average wages.

For everything he earns over £21,000 the Inland Revenue will automatically take back 9%.

So if he earns £26,000 after he graduatesa good starting salary for a graduate engineer – then he will pay back 9% of £5000 or £450 per year.

Importantly, if his salary is lower than £21,000 he pays nothing, and although the debt increases as interest is added, his goods can’t be re-possessed to pay this debt.

And finally after 30 years – when my son would be roughly 52 – the debt will be written off.

This all seems pretty reasonable – effectively a graduate tax – and not really enough to discourage people from higher education.

What’s the problem?

The problem is that the interest on his £50,440 loan is (RPI + 3%). So if the Retail Prices Index is 2%, then the interest rate is 5%. And 5% of £50,440 is £2,522.

So in his first year of earning, his debt will increase by over £2000. He would only begin to pay off his loan if his starting salary was about £49,000! Only a tiny fraction of graduates will ever earn this kind of salary.

So under the terms of the loan, I can’t see how the majority of students – who in general earn less than engineers – will ever repay the capital on their ‘loan’.

And this means that far from being sustainable, the country – that is you dear reader – is taking on an additional £9 billion per year of unfunded debt which will never be repaid.

And that means a bailout at some point in the future and another national debt crisis. Or it means changing the terms of the loans in midstream.

I have ignored lots of things in these projections. For example, inflation, and the proposed increase in the £21,000 earnings threshold. However I think they still serve to indicate the magnitude of the problem – students earning realistic salaries after graduation will never re-pay their debt and create a sustainable fund to support higher education.

Below are graphs summarising a couple more scenarios – one rather optimistic and one more realistic. Please note that the scales on the graphs are all different.

You can download the spreadsheet that generated the graphs here.

Student Loan 2

Simplified – and realistic – projection for how my son’s salary might change through the years – and how his debt would change until it is written off after 30 years. Note the debt rises to £180,000 after 30 years.

Simplified - and highly optimistic - projection for how my son's salary might change through the years - and how his debt would change until it is written off after 30 years. Note the debt is paid off after 30 years.

Simplified – and highly optimistic – projection for how my son’s salary might change through the years – and how his debt would change until it is written off after 30 years. Note the debt is just paid off after 30 years.

P.S. Thanks to Dave and Jayne for putting me right on the terms of the loan. The best site available describing the terms is the Money Saving Expert guide.

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6 Responses to “I am worried about student loans”

  1. iamamro Says:

    I do feel sorry for young people these days. Whatever you say – that much debt must be off putting. It’s something we as a society should pay.

    Also, I’m not convinced the American model of everyone going to university is the way to go. For many – it’s completely pointless.

    • protonsforbreakfast Says:

      Yes. Counting the cost explicitly and assigning it to an individual is invidious. What next – do we get a bill for our schooling that we have to pay off? Personally I think a graduate tax at that level would be reasonably fair, but assigning the debt to individuals makes no sense.

      As Bob Dylan once said, “Times are strange”.

      M

  2. Dave Says:

    The sustainability might depend on what the 3% is for. If it is a fee paid to a company for managing the debt and repayments, then even the usual government inability to recognise value for money will have been surpassed. If it feeds back into the coffers then it could just be a way of getting more money back from higher earners. I note that at today’s prices (inflation at 0% in your spreadsheet, i.e salary increase at 2.5%) your “simple and optimistic” scenario has your son repaying pretty much the full amount borrowed (48k).

    • protonsforbreakfast Says:

      I don’t know the origin of the 3% but I had guessed it would be to repay interest on loans to the student loans company from the government and other investors.

      There are many different scenarios that could be modelled, but 0% RPI isn’t likely to be sustained for a long time, and the Bank of England have a duty to try to drive it up to 2.5%.

      But yes, it could all work out fine and I am just making a fuss – but it seems more likely than not that people on average salaries will never pay back anything but interest and small amount of the loan capital.

      M.

  3. I am still worried about student loans | Protons for Breakfast Blog Says:

    […] Making sense of science « I am worried about student loans […]

  4. mortgage calulator Says:

    Yeѕ! Finally something about ƿersonal loan interest rates.

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