Students – lower earners deferring to 2012 could pay LESS

Students – lower earners deferring to 2012 could pay LESS

A’level results are out this week and usually many students consider fun gap years, or the option of postponing a year to get into the uni of their choice. Yet this year, for some this option’s filled with fear as that means they’ll face the new 2012 system in England with up to £9,000 annual tuition fees.

But while the headline fee difference is huge, the cost difference is not as stark, for everyone, as many believe due to the change in repayment structure. The following quick reference table has been prepared as part of the Independent Taskforce on Student Finance Info  (which I head up) to show the difference.

So what does this mean in practice for deferring students?

Those who start in 2011 stay on the current lower fee regime throughout their student life, so certainly the overall money you’re eligible to pay is larger for 2012 starters – however the real question is how much of it will you actually need to repay?

Of course, with bigger fees, higher interest rates (currently its RPI (inflation), under the new system it can be as high as  RPI + up to 3%) and lower repayments for those who earn higher salaries in the years after university, 2012 students will certainly end up paying very substantially more in total.

Yet while 2012 starters have much higher fees and higher interest rates, they only have to repay if they earn over £21,000 – much higher than is likely for 2011 starters.

This means those above the repayment threshold in 2012 will likely have over £300 a year more disposable income than 2011 starters. And those who don’t gain financially from their university education and have low salaries may end up paying less in total (within the 30 years before the debt wipes) because of the higher threshold.

(If you wondering why I used this fact as the title its because everyone assumes it’ll be worse, so I thought it more important to highlight when people’s assumptions are wrong.)

For full info on how this works read the Student finance 2012 guide which will take you through it.

A nerdy extra bit – why does it say that 2011 starters repay at £17,500 not £15,000?

Current graduates start repaying their student loans when their earn above £15,000. Yet  from 2012 until 2015, this threshold is increases with RPI inflation every April, based on the rate from the prior March.

We know March 2011’s RPI rate was 5.3% so that will be the change in April 2012, yet that still leaves three year’s worth of inflation to be factored in by 2015 – which is when most 2011 leavers will start to repay.

Predicting inflation is notoriously tricky – so for the sake of illustration I’ve plumped for an average 3.5% over these years – roughly in-line with treasury forecasts.

If inflation is lower, then 2011 starters’ repayments will need to be higher, if inflation is higher their repayments will be lower. It would take a 10% average RPI increase in the three that we don’t know yet for the two repayment levels on leaving to be on parity for the two systems.

From 2017 the threshold for 2012 starters (ie, £21,000) starts to rise with average earnings, though at that point there is still no decision as to what happens to the threshold for 2011 starters.