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.
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.
Tags: Student Loans