Thursday 4 November 2010

Daily Telegraph: Lying or stupid?

I'm surprised that Leg-Iron fell for this clap trap in The Daily Telegraph:

Successful graduates will be penalised most by the introduction of variable interest rates on the loans they take out to pay the fees. A university leaver with debts of £30,000 and an annual salary of £45,000 will have to pay back about £2,160 a year for about 30 years. Someone earning £25,000 will have to pay £360 a year for the same debts because a lower interest rate will be applied.

Nope, nothing of the sort. The new rules appear to be (see Box here):
a) The nominal interest rate is set at nil if you earn less than £21,000; at the rate of inflation if you earn £21,000, with a sliding scale so that if you earn over £41,000, the rate is (inflation + 3%).
b) Your repayments (interest and principal) are set at 9% of your gross salary minus £21,000,
c) After thirty years, any residual debt is written off.

It is rules b) and c) which make all the difference - not rule a).

a) If our higher earner on £45,000 a year repays £2,160 a year for thirty years to repay an initial debt of £30,000, the implied nominal interest rate is 5.92% using Excel's IRR function. If we assume 3% inflation + 3%, that means the real interest cost is in fact 3% (by definition). This is the worst-of-all worlds in terms of the total nominal repayments - if you earned less, some of the principal would still be outstanding after thirty years and would be waived (see c); and if you earned more, you would repay the debt much more quickly.

b) So if you earn £45,000, your repayments are (£45,000 - £21,000) x 9% = £2,160. If you earn £25,000, your repayments are (£25,000 - £21,000) x 9% = £360, which tallies with what the article says.

c) Which is why the graduate who earns £25,000 would only repay part of the interest and none of the principal on the debt, whereas the higher earner would repay it in full.

This is just the way the rules work. It has little to do with the interest rates.
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Of course, the lefties are just as bad - they claim that a higher earner would pay less interest than somebody on a lower salary. Also complete bollocks:

For sure - somebody who earns £100,000 a year graduating with £30,000 of student debt would repay (£100,000 - £21,000) x 9% = £7,110 a year for five years and that would be the end of that, so he pays about £5,550 in nominal interest (in real terms, he pays half that).

A median earner on £25,000 would pay £360 x 30 years = £10,800 nominal interest (nothing in real terms) - and also gets the £30,000 waiver after thirty years. And if somebody earns less than that - let's say £21,000 - he pays neither interest nor principal - and also gets the £30,000 waiver after thirty years. The lefties focus on the £10,800 nominal interest paid by Mr £25,000 and gloss over the 'waiving' bit at the end.

But... the worst case scenario is somebody who earns £45,000 a year - he repays (£45,000 - £21,000) x 9% = £2,160 a year but this is just enough to cover the interest and principal repayments over thirty years and his nominal interest cost is £34,800 (in real terms, he pays half that), so yes, he pays more than the person who earns £100,000.
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So in a bizarre sort of way, they are both complaining about the same thing: The Torygraph is complaining that Mr £45,000 pays more than Mr £21,000 - and Red Ed is complaining that Mr £45,000 pays more than Mr £100,000!!
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The way round all this would be to go back to the old ways and have fixed repayment terms that treat everybody the same - if you have a student loan, the interest rate is set at below market rates (let's say inflation) and the fixed repayment term is ten years (or whatever it was, I know I paid off a student loan after 1996 from the interest I was earning on the proceeds of the loan that I had promptly paid into an ISA account).

In olden times, your income was irrelevant in calculating the amount repaid each month, unless you earned very little (less than £12,000 a year, from memory). Once I'm in charge, the repayments will simply deducted from your Citizen's Income, of course, to save 'churn'.

21 comments:

Leg-iron said...

Hey, you're the one who understands money, not me.

I can only go by what's reported.

Nonetheless, I sit corrected. A few more glasses of wine and I'll lie down corrected.

Mark Wadsworth said...

LI, glad to have cleared that up - remember The Golden Rule - they are ALL lying.

Leg-iron said...

I am currently dangling from the light fitting corrected.

It's good wine.

you know, I remember that X-files tag line 'The truth is out there' and sometimes I think...

No. It isn't. Aleister Crowley was right. Nothing is real, everything is an illusion and we are each dreaming our own version of Hell.

At least my version has booze in it.

Anonymous said...

Lying or stupid?

I have to say both.

Lying by spinning the truth to suit their agenda and stupid to believe that all the British people are dumb enough to believe their lies.

JuliaM said...

"At least my version has booze in it."

You've been misfiled then. You're in Don Shenker's hell!

James Higham said...

Meanwhile, the whole principle of students being crippled with debt over something they should all have - education, is not discussed.

Mark Wadsworth said...

LI, JM, my Hell is quite nice. it's just getting out of bed and doing timesheets that really annoys me.

JH, you say they 'should' have education, that's not the question here, which is "Who 'should' pay for it?". And they aren't 'crippled' with debt, they can always take a part time job while studying, stay living with parents because it's cheaper etc.

And even £30,000 is a drop in the ocean compared to an average mortgage of £150,000 nowadays, that we expect postmen and bus drivers to be able to afford.

Sobers said...

So am I right in thinking that basically you end up paying up to 9% of your salary for 30 years, however much you pay off? You can't pay it off early, if you came into some money for example?

Does this not mean (coupled with the drive to send everyone to university) that effectively tax rates are considerably higher than the headline rates would suggest?

If you are a bright young thing would it not make more sense NOT to go to uni and make your way in the world without the benefit of a degree in Lady Gaga studies (OK it is in America at South Carolina University, but I bet something similar can be found here) and save 30 years of up to 9% extra tax?

I would get a trade, do 10 years working for someone else, then set up on my own. By age 35-40 you could be earning more than your degree holding peers, and keeping more of it too.

Mark Wadsworth said...

S, you don't have to repay more than the original loan, I've done some charts in the next post to illustrate this.

It's all not as dramatic as people make out. But either graduates pay 9% extra tax for a few years, or everybody else pays 2% extra tax all the time and for ever.

The whole idea of having tuition fees is to make people aware of the cost, i.e. if you are prepared to be £30,000 and lose three years of your working life, is this really better than doing an apprenticeship or other training or setting up your own business etc (as you suggest).

Scott Wright said...

I have one question.

Should this system come into place, will it only be for students who began their course after 201X as with the previous change to the rules?

If thats the case we are going to have a 3 tier repayment system, we already have a two, I think i'm caught up in the shite one where the debt is only written off at age 65.

Mark Wadsworth said...

SW, presumably it will be a mish mash of three systems with all manner of 'transitional measures' to keep civil servants busy.

Scott Wright said...

"I would get a trade, do 10 years working for someone else, then set up on my own. By age 35-40 you could be earning more than your degree holding peers, and keeping more of it too."

If I had my time over I don't think i'd have gone to university, I have learned far more in my 3 years of employment in practice than I ever did on an accountancy degree, going down 4 days work, 1 day college AAT apprentice route would have given me zero debt to the taxman and probably would be closer to fully qualified too.

James Higham said...

And even £30,000 is a drop in the ocean compared to an average mortgage of £150,000 nowadays.

Yes but do we need to draw that comparison? One involves the future contribution of our children to the society, in making it vibrant - their abilities and well ... their education ... and the other is to do with their living conditions.

In the first slug, it is either young people trying to start out or a further burden to their parents' existing burden.

I'm suggesting that considerable choice exists in housing - one can take a lesser dwelling [although even those are way overpriced] but in the case of the student loans, it is cutting out so much potential in the society.

Should students pay? I was paid for for three years, on condition I worked for the LEA school of their choice for three years after that. I had no crippling loan to pay back, on top of trying to set up house.

Scott Wright said...

"SW, presumably it will be a mish mash of three systems with all manner of 'transitional measures' to keep civil servants busy."

Oh yeah gotta keep the civil servants busy. Or we could just simplify the system & sack almost all of em eh? *wink* *wink*

Mark Wadsworth said...

JH, all education costs money, and I am fully in favour of giving children education vouchers up to the age of 16 or 18 so that children with poor parents (or parents who don't care) aren't unduly disadvantaged.

But from a certain age, you have to decide what to do with your life and take responsibility for yourself.

You can do an apprenticeship, which you pay indirectly by working for below-mark-wages for a few years until you get your certificate. Or you can pay to do an HGV driving licence. Or you can borrow money to buy a van and some tools and become a painter and decorator. Or pay to do courses and professional exams in accounting (like me or SW above). The list is endless.

Why should 'university education' be subsidised by the taxpayer generally and not the others? If were interested in giving everybody a good start in life, then the taxpayer would have to top up an apprentice's wages by paying him an extra £200 a week; paying for people to do HGV licences; buying vans and tools and giving them to young painters and decorators or paying for SW and me to go on accounting courses.

As it is ludicrous for everybody to subsidise everybody else, why can't everybody just pay their own way? By giving students a low interest soft loan and paying them a maintenance grant (aka Citizen's Income) they are still getting a decent slice of the pie, aren't they?

Or for that matter, why should engineering companies have to pay a bit of extra tax so that the government can allocate some of that to university for engineers? If you reduced the tax and scrapped the subsidies, then engineering companies would train up their own engineers etc.

SW, indeed. There'll have to a bit of a big-bath approach with all these bits and pieces left over when I'm in charge.

Bayard said...

I would get a trade, do 10 years working for someone else, then set up on my own. By age 35-40 you could be earning more than your degree holding peers, and keeping more of it too.

Yes, but you're fighting hundreds of years of snobbery - the idea that it's the duty of every free-born Englishman (or woman) to improve their social standing if they can an leave the trades to those who can't. The idea that someone with intelligence (possibly even a woman with intelligence, egad) might be happier and richer being a tradesman (or woman) and actually doing something useful than being a "professional", doesn't seem to cross most people's minds.

Sobers said...

@Bayard: people better wise up sharpish then - more and more I see middle aged/close to retirement age tradesmen, with no youngsters coming through to take their place. If you are young, have a brain and some half decent practical nous you will be able to name your price for practical physical work that the 'oh I'm above all that labouring' so called middle classes won't (or more likely can't) do.

The professional classes may soon find that the plumber, electrician, builder, tree surgeon, landscape gardener etc etc that they are forced to employ outearns them by some margin. And is able to retire on the proceeds of their business sale early, while the office wallah has to toil away until 70.

Bayard said...

"The professional classes may soon find that the plumber, electrician, builder, tree surgeon, landscape gardener etc etc that they are forced to employ outearns them by some margin"

Well, I and my fellow director already earn less than the best-paid tradesmen in our employ, and I see nothing wrong with that. It's snobbery, pure and simple that says a tradesman should earn less than a company director or someone in "the professions".

The other thing that young people seem to fail to realise is that, in the trades, intelligence is far more of an asset than in the professions. I used to know a smart chippie who only worked nine months of the year (to avoid being in the UK in winter) and still earned more than most of his contemporaries.

Tim Almond said...

Bayard,

The professional classes may soon find that the plumber, electrician, builder, tree surgeon, landscape gardener etc etc that they are forced to employ outearns them by some margin. And is able to retire on the proceeds of their business sale early, while the office wallah has to toil away until 70.

The internet (and computer technology in general)has lowered the value of what the professions do. They store billions of facts, so if all you're really doing is regurgitating facts or repeating a routine process (like conveyancing) then people will start to replace you with a computer.

The real money is in being able to take peoples needs and to deliver something for that by applying specialist knowledge, something that a computer can't do.

Charlie B. said...

James Higham said: "Yes but do we need to draw that comparison? One involves the future contribution of our children to the society, in making it vibrant - their abilities and well ... their education ... and the other is to do with their living conditions."

The one thing we DON'T want is for anything to be "vibrant". It is a sword with no meaning and only one use - to dress up wasteful, pretentious and unwanted local authority schemes for run-down areas.

Charlie B. said...

hmm - not a sword, a word.