It’s all because people will borrow more but repay less each month
Under the changes to student finance in England that hit new starters in 2012 (see the full Student Finance 2012 – facts not myths guide) there are four key facts that radically effect the amount people will repay compared to the current system…
- The amount of borrowing is greatly increased. Tuition fees will average at around £8,000 a year, plus add in annual maintenance loans of £4,000 – £7,000. Combined that’s where the headline £50,000+ figure for a full time student on a three year course comes from.
- Repayments are lower than now. Graduates will only need to repay 9% of everything earnt above £21,000 and this threshold will rise with average earnings – for this year’s graduates it’s 9% of everything above £15,000.
This is the ONLY fact that affects monthly repayments – earn more and you repay more – earn less and you repay less (or as someone recently said to me…"no win, no fee").
- Higher interest is being charged. Currently the student loan interest rate is set at the maximum of RPI inflation (see Should I overpay my student loan?). But from 2012 depending on your income, the minimum will be RPI and the maximum RPI+3% – meaning interest will accrue more quickly.
- The debt wipes after thirty years. On the 30th anniversary of the April following graduation, the debt wipes, whether you’ve cleared it or not (also worth noting that if you die the debt wipes then too – ie, it is not passed on to your descendants).
Combine the bigger borrowing and higher interest with the fact that you repay less each month, and the 30 year limit and you can see why many people won’t repay in full.
There’s no better way than spending two minutes playing with the calculator to see this, just look at how few scenarios there are when people pay off their loan in less than 30 years (which is what indicates it’s fully cleared).
If people won’t repay how does it add up?
With all that added together, it’s no surprise what I’ve been emailed/Facebooked/Tweeted by many people, saying something like:
@MartinSLewis So either a) the Government has a massive deficit or b) we’re going to take money from universities that they’ve already spent"
And I understand where this conclusion comes from. If so little of the money being loaned out will be repaid – surely the system has a real problem.
The bit people are forgetting
For ease of numbers and explanation, let’s say the cost of educating each student at a university is £8,000 per year.
- The current system – how a university is paid
It receives £3,000ish tuition fees from the Government (Student Loans Company) repayable by graduates in later years.
It receives £5,000 from the Government (called the teaching grant).
- The new system – how English universities in 2012 will be paid
It receives £8,000ish tuition fees from the Government (SLC) repayable by graduates in later years.
So currently, less than a half of the money the Government gives to universities for teaching (research is different) is repayable to it. Under the new system the majority will be repayable.
Nerdy interlude – feel free to ignore! The numbers above are massively oversimplified. The average cost of a course is less than £8,000. The amount it costs per student varies hugely per course. The teaching grant isn’t being entirely phased out in all subjects. The average tuition fee in 2012 will be higher than £8,000 but some of that money will go to bursaries and grants. So don’t use these numbers as gospel, they’re just used to keep my explanation of the concept easy to understand – not as a pure assessment of the actual change.
Now, take this logic on a step further by plugging some (made up approximate) numbers in to show the impact.
If currently 70% of the tuition loan is fully repaid and we say it drops hugely to only 50%, then of the £8,000 given to universities under the current system about £2,100 is repaid, but under the new system nearly double that, £4,000 is repaid.
So even with a lower repayment amount, the new system is still beneficial to the Treasury. And this ignores the fact that the interest rate is higher under the new system, which means the Government will recoup even more.
This isn’t an argument for the new system
Please don’t read this as a defence of the new system. My point is that those jumping to the conclusion it isn’t sustainable on the back of the calculator are missing a very big element of the business logic behind this. In fact, the Government’s budget on higher education will be drastically reduced by the changes.
Yet that neither means the system will work well, nor that it’s fair. If nothing else, it shows that the loan book will be huge – and the amount of cash the Government will have to pump out each year will also be huge – and it’ll take much longer to recoup – these alone could mean it may need limit the number of students. However, these are subjects for another day.
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