Does the Adam Smith Institute understand how student loans work?

I was shocked and befuddled to read a confused argument in a blog by the Adam Smith Institute (ASI), supposedly the bastion of free market economics. It effectively suggested all students under the new 2012 system should be encouraged to repay their debts early. BALDERDASH!

That’s financial suicide for many. Like it or loathe it, the premise of the student loan repayment system is you contribute in accordance with earnings. Those who gain more from their education end up repaying more, and more quickly (though admittedly for very high earners the curve is perverted, see www.studentfinancecalc.com)

The Adam Smith article comments on the back of a Times Higher piece, which says:

quotes Tim Leunig of CentreForum and a lecturer at the London School of Economics as saying graduates should think twice about paying off their debts early because most will never repay the full amount within 30 years, after which time arrears are written off".

Well Tim is 100% right – and he knew I’d say that (and probably blog on it) which is probably why he tweeted this, so I’d see:

The Adam Smith Institute thinks I am "morally bankrupt" (!) Still, @MartinSLewis agrees with me: www.moneysavingexpert.com/students/student-loans-repay"

Why overpaying student loans can be dangerous

Even current graduates should think carefully before repaying student loans any quicker than needed. Because the interest rates are so low (1.5% for most), they could earn more by saving it (see Should I repay my student loan?).

Under the new system, while the interest is higher for some, many won’t repay in full within the 30 years before it wipes. So for them to overpay often doesn’t make sense, as paying more doesn’t usually reduce their future repayments (though overpaying does work for some in this situation depending on the interrelation of interest and when they overpay, but let’s leave that for another day).

Let me use a simple example

Student loans are repaid after graduation at a rate of 9% of everything you earn above £21,000 (this threshold will rise). So if you never earn above the threshold, you never repay a penny. Therefore overpaying here is clearly throwing money away.

Now an example of someone earning more

Even a graduate on a starting salary (£22,000) which rises at 3% above inflation for 30 years, who has taken the full £9,000 tuition fee and away from home (non-London) maintenance loan of £5,500 would have accrued a total borrowing of around £43,500.

According to www.studentfinancecalc.com, their repayment over the 30 years before the debt is written off (at today’s prices) would be £27,410 – far less than their original borrowing. So even then, most overpayments wouldn’t reduce the amount paid back. For more on how this works see Student Loans 2012 Mythbusting.

With that said, you can see why I was surprised about the Institute’s view. It goes on to attack Tim’s view saying:

What he really means is that failing to repay is a good kick in the ass to every hardworking taxpayer now stumping up the cash".

Ridiculous. As I’m sure Adam Smith himself would’ve understood, the loan repayment system is more of a hybrid between a loan and a tax. It’s proportionate to earnings, doesn’t go on your credit file and if you lose income you don’t need to repay, as it’s paid through the payroll.

In Australia they call it a ‘contribution system’, not a tax. So let’s be plain, this is a predefined contribution the graduate must make. Yet the ASI is arguing people should volunteer to pay more, even when it won’t save them anything.

The Adam Smith Institute’s point is about Government outlay

Of course, its argument is that if people paid more, it’d help the Government out, especially as under the new system fewer people will repay in full than before.

Yet again I think this is a weak point…

• It’s about a fair share. When you go to university, hopefully you gain and the economy gains too. It’s a partnership. The current system assumes all bear some brunt of the cost (under the new system the student’s brunt is heavily increased). This is what a contribution system is all about – it’s about paying what politicians have decided (rightly or wrongly) is an adequate percentage.
• The new system costs the Government less. The idea that because fewer people will fully repay, the Government must pay more is fallacious. Under the new system, almost the entire funding now needs repaying by the student. Under the old system, of big block grants, it was less than half. Not only that, but many graduates must now pay real interest rates too.

  So while a lower percentage of what’s ‘owed’ is repaid, a much bigger total amount is. (For a full explanation see my If few will fully repay student loans, how’s the system sustainable? blog)

I say the Government should TELL people not to overpay

In fact, I think the system is duty-bound to warn people when they overpay their student loan if they won’t gain from it. Even now, many get it wrong. Under the current system the average salary of people who overpay is just £18,400. While this is likely to be pushed up under the new system, it still means many who pay early will already be financially penalising themselves.

This is why in the MSE Submission against early redemption penalties, we jointly proposed this with the NUS:

Whether repayment penalties are introduced or not, it is important students understand the impact of their repayments – as for many it will be a futile gesture.
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."

So with all that said, I don’t think my view could be further away from the ASI. Wonder what they’d make of my Don’t pay tuition fees upfront guide? It says even some who have got the cash to pay upfront should avoid it.

Surprise call from Ed Davey, Energy Minister

It’s rare (well it never happens actually) a Secretary of State calls me out of the blue, especially in his first week in the job. Yet Ed Davey, the new cabinet minister responsible for energy and climate change, has done just that. 

In a nutshell, it was all about him wanting MSE (and others) to launch a collective switching service.

(Note I’ve bashed this blog out at speed as it’s an important message)

Of course, he knew this was very much an open door. I’d been mulling it over anyway, and we discussed it at the energy summit.  It makes my tweet last week when I heard he’d got the job seem flukily prophetic:

Just heard Ed Davey moving up to Sec State for Energy. He’s VERY pro collective purchasing, expect a big push on that in energy market.

This was bang on.

He tells me the very first conversation he had with his permanent secretary to set out his absolute priority was about collective purchasing.  This has been his big baby for a while. It was when I first met him as consumer minister about a year ago, and he’s been working with Consumer Focus on it.

What does collective switching mean?

The concept, in its generic sense, means a whole bunch of people switching at the same time whether via a credit union, a village group, or even a site like MoneySavingExpert.  

It’s currently done in the Netherlands. Effectively, a group of people act together and an intermediary company sources a deal in an auction, hopefully at a discount – and this repeats each year.

My view on how it’d be best here is slightly different to that – though whether it can be pulled off is an important question. My suspicion is the winning model here would be to allow people to switch once to a trusted intermediary so they know they’re getting a continually competitive price without needing to switch again. (See this Are there too many tariffs? poll for evidence).

As the current bill is typically £1,320 but the cheapest is £1,030, there’s a lot of room for savings. I doubt a system like this could guarantee the ultimate cheapest tariff, because that would take a regularly switching tart, but I think  people would be happy to go for a consistently reasonable deal that pushed the market.

Even if MSE could get 0.5% of our 13.4m unique users a month to do this, it would be a powerful platform to start it. 

Of course it’d need to pay to be doable

This is a decent-sized undertaking and whoever does it, it’d require staff and a team to do it – never mind not wanting to dissuade entrepreneurship.  

My view is that if £15 – £25 a year could be generated per household it should be doable – that’s a back-of-the-envelope sum so could be way out – which is a fraction of the amount the switching sites take per switch (in fact see Cheap Gas & Elec and you’ll see it’s even less than the cashback available).

The barriers to entry

While Consumer Focus has been doing some great work on it and Which? are planning to do something that could be based on something like the Dutch model (the market leader there is iChoosr).  My idea would be slightly different to that.  Therefore whether it’s possible is tricky. 

As I said to the Minister, part of the problem is the government saying "please do this" – yet we need the government or Ofgem to set out the rules.  I want to know that if we organise a switch with Acme Power and its service is bad for a customer, we’re not liable.

So an off-the-peg package of rules, liability and guidelines before this starts, which gives a level playing field to players big and small, would be very welcome.

For example, there should be an ability to cancel, yet should it be at any moment, or only at renewal? Or will cancellation penalties be allowed? A cancellation could affect the contract with the energy provider. These questions would need answering.

He’s certainly onside on this and said it’s his priority to get his department to push this and make it happen at speed. So, full steam ahead?

I’d love your views (below)

Related Blogs/Stories

• David Cameron Energy Exclusive
• Prime Minister, if prices don’t fall this summit will be a failure
• Notes to Energy Minister its not just laziness that stops switching

A dragon in the Napoleonic wars

I’ve written before of my predilection for historic and science fantasy novels, (see my top 10 summer reads) so I reserve a special sense of tiggerish excitement for a book that combines the two. Having just finished all six in the Temeraire series in a row, and slightly saddened at that loss until Naomi Novik writes more, I’ve decided to share the series with you.

I discovered the series as a Kindle 79p book promo (Temeraire for the Kindle is now £1.99, the cheapest paper version’s £5.98 and of course you could also check whether it’s in your local library). The Kindle’s ‘try before you buy’ (download a sample system) has made me more experimental with books I know nothing about (if you’re planning to get a Kindle, do note there are currently cheap Kindle codes available).

This book hooked me in straight away – whereas I’ve learnt from many books in the past not to bother to carry on reading.  

Don’t worry, I’m not going to write too much of a spoiler, just the essence of the series. It’s set in Napoleonic Britain, all is as was, with the one minor exception, that sentient dragons exist and are in military service. While far-fetched, it’s done in such a clever and touching way that while reading it, it really doesn’t seem at odds. Dragons exist and they link up with their ‘Captain’ in a life-long partnership.

We see the world through the eyes of Temeraire, a rare dragon breed, and Laurence, a senior naval captain reluctantly switched to dragon back through a happenstance of chance.

There’s an undercurrent of linking the treatment of the dragons to the slave trade, which Wilberforce and the abolitionists were trying to make illegal in the UK at the time. British dragons are depressingly seen by the powers that be as beasts of burden, part of the armaments of a country, and whenever dragons show their intelligence, this is seen as a party trick learnt by rote – by those outside the ‘air corps’ (the direct dragon handlers). 

Yet in China they’re seen as honoured citizens. Streets widen to accommodate these heavyweight beasts and they’re part of the caste system, just like people.

While in the first book many of the military actions Temeraire and Laurence engage in are based on historical fact, as the series moves on these diverge into the fictional. At first this was frustrating, yet later I came to love it. It was a joy to follow the author’s reimagining of the difference in outcome had dragons been involved – with aerial bombardment and warfare (albeit slower than modern planes) taking place in an age which had none.

Now don’t allow this dissection to put you off. This is a great, romping, page-turning adventure story. If you’ve time on your hands, or like me, need a good bit of escapism to get away from the day’s stresses, this is worth a try.

The first novel immediately hooked me and the quality was uniformly good throughout (well, all if I’m honest bar book three, which I felt was the runt of the series and just a linking piece to connect the others – but persevere through it).

Let me know below what you think if you’ve read some of the series…

Related past blogs

• Amazon Kindle – probably the best customer service in the world
• Jonathan Strange & Mr Norrel – book list update
• My top ten summer reads – Shardlake, Ghengis, Sharpe and more
• Crime and ferocious murder – a great way to learn about the reformation

MoneySavingExpert: a stronger brand than iTunes

Here at MSE Towers, we’re a little gobsmacked after reading new research about ‘brand strength’. We don’t really think of the site as a brand and we don’t deliberately try and cultivate that image, but it seems we have become one without trying.

I was first alerted when someone emailed a Scotsman article based on a YouGov poll on UK-wide brand strength based on quality, value and customer satisfaction. The piece stated:

"In the online category, Martin Lewis’s Money Saving Expert website beat off competition from global names such as iTunes to take the top spot, while internet phone service Skype was rated higher in the telecoms category than providers such as BT and Orange."

Then there was the Buzz Index index (which I think is separate) which put us at number 8 after recent positive feedback on brands:

1. Amazon
2. M&S
3. BBC
4. Google
5. John Lewis
6. Apple
7. Sainsbury’s
8. Money Saving Expert
9. Cathedral City
10. Waitrose

The contrast between MSE and the other brands is rather interesting. We’ve less than 40 staff, the others are, I suspect, in the 1,000s or 10,000s. We don’t have a brand manager or consultants, we just focus on trying to save people some money.

I’m sure some people within the branding industry would be able to explain why the MSE brand works, dissecting it to the nth degree, but actually I think I’m probably better off not knowing.

It makes me fearful of change

It does put me in two minds about our recent masthead change. My cherished garish green has gone and been replaced by a much classier and more professional looking masthead. But will the fact it no longer feels so homespun and personal impact people’s perception?

Then again, as I wrote a couple of weeks ago when we first launched the new homepage, the fact is we are now at a point where people know what we stand for. I hope we can keep improving the navigation and look of the site, without people feeling we’ve changed MSE’s ethos (we certainly haven’t).

A40 speed limit: is TFL incompetent or misleading

They say it should be back to 50mph by late summer [2011].”

Well last summer is a long time ago and still no sign. There are still 30mph speed limit signs on the road, with 40mph printed in a difficult to read manner over the top.

As I wrote in my initial new 30mph limit on A40 Westway is dangerously slow blog, the road is a nightmare for two-wheeled drivers like myself. If you try and stick to the speed limit, you are overtaken by cars going far faster, who see you as a menace going at slow speed. While this is better with a 40mph limit, there are still problems.

As my first blog was a small contributor to instigating coverage over this issue, I’ve deliberately written this again to do the same and remind TFL that those of us who drive regularly on this road haven’t forgotten the promise. TFL, either you’re ridiculously inefficient, or this was a cunning plan to hope we’d get used to it – which is it?

Last week I blogged about our proposed new masthead for the site and other changes (see New Masthead blog). After all your feedback, we’ve been working on some improvements, and before we go live I’d love your feedback.

The ‘new’ masthead (see below for the new new one)

Click here to see a clearer full size version

While most of the feedback was good, there were a few issues which we’ve tried to address below:

• My shirt colour too bland: In many ways this was a deliberate choice of pic, as I don’t want to dominate the site. I’ve been reducing my head size gradually over the years and would love to get to the stage where it’s not there anymore, but as many of the searches for the site involve my name and people get confused with other sites, it’s important it stays. Yet we’ve upped the colour level a bit in photoshop.
• The Forum Button: It’s a lot more prominent now and has both a direct click and a menu dropdown option.
• The ‘You look like a comparison site’ issue: MSE has always had a homely or even homemade feel. We feel it’s right to get rid of some of that flavour for clean lines, for easier browsing and navigation. Yet of course that means we follow more of a standard path.

  Some people pointed this out and said we’d lose the charm that comes from garishness and quirkiness by doing so. I think there’s some truth in that. Thus, much to my designer’s dismay, I asked for a slightly jarring, clashing element that’s reminiscent of our old ‘consumer revenge’ stance and which shows the true flavour of the site, to go back in. That’s where the deliberately slightly clunky placard comes from.

As for the folded arms photo – it was a bit like marmite to people, so we’ve decided to go for it to see if it works.

The new new masthead

Click here to see a clearer full size version

Important! Please let me know which you prefer using the discussion links below: