I am still worried about student loans

By how much can one expect a salary to increase over 30 years? This is my salary for the last 26 years shown in raw numbers, and then adjusted for inflation into 2013 pounds. My inflation-adjusted salary peaked in 2009 a factor 1.71 higher than my salary in 1987.

By how much can one expect a salary to increase over 30 years? This is my salary for the last 26 years shown in raw numbers, and then adjusted for inflation into 2013 pounds. My inflation-adjusted salary peaked in 2009 a factor 1.71 higher than my salary in 1987.

Today I took my baby eldest son to University  and left him alone amongst a pack of wolves at his University flat.

A few people commented to me this week about my previous post concerning my son’s student debt.

My colleague Dave, for example, thought that I didn’t really need to worry, and that the apparent bonkers-ness of the loans was caused by a neglect of the effect of inflation.

I promised I would make some more calculations, and in between bouts of melancholy, I have made those calculations.

And I am still worried.

My Salary and Inflation

For a given amount of debt, there are three variables in this calculation:

  • Starting Salary
  • Interest Rate = 3% + RPI
  • Rate of Increase of Salary.

So following Dave’s suggestion I set inflation = 0% which means the real interest rate is just 3%. That leaves just two variables .

I looked at my own salary to find out what might be a reasonable assumption for how much a salary might increase over the course of a career.

This data is shown in the graph at the head of the article. Taking the inflation-adjusted salary increase of a factor 1.7 over 26 years I calculate that this is equal to a 2.1% annual real increase. I think this is probably a larger increase than many people experience since I am (just) in the top 10% of the UK income distribution.

So now we just have one variable: starting salary. This can be compared with my own-inflation adjusted salary in 1987 (after my PhD and two years work) of around £30,000.

The graph below shows how starting salary affects debt repayment in this ‘no inflation’ , ‘realistic-salary’ model.

  • If his starting salary is £25,000, then the debt is never repaid.
  • If the starting salary is £30,000 – the inflation adjusted value of my own salary when I started working- then most of the debt would be unpaid.
  • If the starting salary is £35,000 then the debt would be nearly repaid after 30 years.
The effect of starting salary on debt repayment. This assumes that my son's income rises at the same inflation-adjusted rate that my income rose. If his starting salary is £25,000, then the debt is never repaid. If the starting salary is £35,000 then the debt is nearly repaid.

The effect of starting salary on debt repayment. This assumes that my son’s income rises at the same inflation-adjusted rate that my income rose, 2.1%. If his starting salary is £25,000, then the debt is never repaid. If the starting salary is £30,000 (the equivalent of my own inlation-adjusted starting salary), then only a small amount of the debt would be repaid. If the starting salary is £35,000 then the debt is nearly repaid after 30 years.

So, assuming zero inflation and a year-on-year real rise in income like my own (~2.1% p.a.) the maximum repayable debt can be expressed in terms of starting salary.

Maximum Repayable Debt ≈ 2.35 x (Starting Salary) – £37,000

e.g. For a starting salary of £25,000, the maximum repayable debt is about £21,500.

This can also be expressed in terms of the minimum starting salary to repay a given debt within 30 years

Minimum starting salary = (Debt + £37,000) /2.35

e.g. For a debt of £50,000 the minimum starting salary that would ensure repayment within 30 years would be £37,000.

Of course this is the future – so  anything could happen. But these calculations further reinforce my view that I am right to be concerned.

Perhaps in 4 years time real starting salaries for engineers will have risen, but I somehow doubt it.

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5 Responses to “I am still worried about student loans”

  1. Mary Anne White Says:

    Michael,

    I enjoy reading your blog, and your analysis of various scientific and non-scientific topics. I thought I’d share my experience re. student loans, from a Canadian perspective.

    First, I should say that we are very lucky that our two “children” managed to get through university without student loans. They worked in the breaks and we helped out as they went through degrees (soon to be 5 degrees over 2 children). Their grandparents also helped quite a bit. The first degree is the tough one financially for most students as often they are working or have scholarships and/or grant support for higher degrees (at least in science here).

    Our children are 29 and 31 now — older than yours, so I can comment from the other side. Although they graduated without debt, the average graduate debt per graduate in Canada is about $40,000. I have seen many students really struggle under this debt — graduate students in my lab with meager graduate stipends and leftover undergraduate debt, undergrads who I am teaching, and especially friends of my children. Some are now in their 30s and ready to get on with life (married, jobs, children) but still have this huge black cloud hanging over them. A friend of my daughter’s has a good job and wife and baby and wanted to buy a house this summer but his student debt was so high that he was not approved for a mortgage. So now he’ll have to throw away money on rent instead, and never get ahead.

    Many students who are saddled with these debts really did not need the funds but they were approved, and took them. This way they had plenty as students to go to the pub with friends, and have an I-phone, etc. But when they graduate they only get entry positions and have a difficult time making even the minimum payment.

    I think that student loans are like crack cocaine — handed out too easily to get one hooked, and then impossible to get out from under. I think that they will ruin a whole generation as they never had to scrimp and save as students, or even think hard about whether higher education is for them, and then later will truly pay for it.

    Anyhow, that’s my view from here.

    All the best,

    Mary Anne

    Mary Anne White, BSc, PhD, DSc, FRSC University Research Professor Department of Chemistry Dalhousie University 6274 Coburg Road P.O. Box 15000 Halifax NS B3H 4R2 Canada Tel: (902) 494-3894 Email: mary.anne.white@dal.ca Research Website: myweb.dal.ca/mawhite/ Director, Dalhousie Research in Energy, Advanced Materials & Sustainability (DREAMS) DREAMS website: DREAMS.irm.dal.ca See also: http://www.physicalpropertiesofmaterials.com

    Address for Courier: Chemistry Building, Room 212 6274 Coburg Road Dalhousie University Halifax, Nova Scotia B3H 4R2 Canada ________________________________

    • protonsforbreakfast Says:

      Mary Anne

      Well said. I have read about the student debt crisis in the US, but did appreciate the situation extended to Canada.

      In the UK the system is more benign in that nobody can be declared bankrupt because of this debt, but the ‘graduate tax’ does reduce the graduates useable income and so makes property -buying and family life in general more precarious.

      My concern is two-fold. Firstly, it seems inevitable that the entire system will be declared bankrupt within a few years and need to be bailed out. And Secondly I am concerned for my son who – all things going well – will start his working life with an un-repayable debt.

  2. Lloyd England Says:

    Personally I don’t think there’s toooo much to worry about.

    I went to uni just before the tuition fee changes came in, so I’m in a slightly different position, however I still left uni a few years ago with £20k+ of ‘debt’.

    I put the word debt in inverted commas, because while people who never had it may think differently, to me and others I know it doesn’t really feel like a ‘debt’.

    When I left uni my first job was already above the threshold so I started paying back my loan immediately – and because of that, I’ve never known my paycheck to not have it, so I’ve just ‘got used’ to it. It automatically comes out, along with NI and Tax, and it just feels like another tax. I think if I lived a few years without having to pay it off, and then suddenly had to I may notice the monthly knock on my wage, but so far as I said I’ve just been used to it always being there and not really noticed. And the student loan doesn’t affect getting out other loans or mortgages so that’s a bit of a bonus too.

    Having said that, it is a bit hard to hear about when someone earning a few £k less than you without a loan has a similar/same ‘take home’ pay. But, such is life!

    • protonsforbreakfast Says:

      lloyd

      Thanks for your thoughts. As I said in the first piece it is not really my son’s financial situation that concerns me, nor my own. What bothers me is that I just don’t understand how the system is supposed to work.

      If it were a graduate tax I wouldn’t mind – the debt would be national debt and graduates would pay it back long after they had ‘personally’ paid back their own ‘loan’. I am worried that this debt will never be paid back and that two years down the road we will have another ‘bank’ crisis.

      Anyway – at least you have a high paying job at NPL 🙂

      M

  3. My Election Suggestions | Protons for Breakfast Blog Says:

    […] During that period my salary (adjusted for inflation to the value of 2015 pounds) has stayed roughly constant at around £50,000. […]

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