In order to illustrate the interaction of the three main rules that apply to Student Loan Repayments (interest rate increases with salary; repayments increase with salary and any balance outstanding is written off after thirty years) which I wrote about yesterday evening, I have done two charts in Excel.
The first shows the total nominal repayments - and it is quite clear that somebody who leaves university and earns £45,000 a year for the next thirty years pays a lot more in pure cash terms than anybody else. So the Torygraph wails that Mr £45,000 pays more than Mr £20,000; and Ed Miliband wails that Mr £45,000 pays more than Mr £100,000. 
But just adding up the total cash repayments is quite misleading, as it does not take the time value of money into account. It is about as informative as saying that if you repay your mortgage over ten years (which I once did, just for a giggle), you pay a lot less interest than if you repay it over twenty years. Of course you do - it's like saying it's cheaper to rent a car for a week than for two weeks.
It is far more realistic to discount the future repayments at (say) 5%, which shows that the three rules, as bizarre as they might be, sort of arrive at an equitable result - provided you are part of the flabby LibLabConsensus that finds it sensible for the taxpayer to lend people money to go to university who don't even expect to earn £21,000 at the end of it, and then write off the debt after thirty years. 
Nope - it was ridicule
38 minutes ago
8 comments:
It looks suspiciously as if someone vaguely sensible in the Treasury, with a shed load more economic and financial nous than bloody Osborne, did the numbers before you, created the graph and told them all about it in words one one syllable and then held a short test.
L, yup. I guess that's why they have three such superficially appealing (but intellectually flawed and contradictory) rules. The clever bloke at the Treasury probably did the graph first, and then made up the rules afterwards.
This is all horribly relevant to us parents of August-born 17-year-olds - to gap or not to gap, that is the question; send your child off to uni with his 18th birthday cake still warm or let him incur an extra £15k of debt.
Meanwhile, I'd be interested to know where you stand on the question of early repayment - I heard it casually droppped into an interview yesterday that, because 'better-off' parents might seek to avoid charges by paying the loans off straight after graduation, there should be early redemption charges as there are for mortgages.
These, presumably, would include the same parents who 'can easlily afford higher tuition fees because their children went to private schools' - regardless of whether that was done by sacrificing the annual family holiday or remortgaging the home.
As you have said before, until a government sees the light over education vouchers, the system cannot function fairly for all.
McH, I don't see a (moral) problem with early repayment without penalties (to put them on par with people who can afford to pay tuition fees up front), but as the interest rate is very low for a soft unsecured loan, I don't see any advantage (to the borrower) in paying it off early.
In other words, if the government had any sense, it would offer discounts for early repayment, because the cost to the taxpayer of funding those loans is vastly in excess of the payments that the graduates will make.
Technical question, how do you determine the discount rate? Am I correct in thinking that it represents the *expected* future interest rate? or expected inflation? In that case are there second-order variables (the discount rate changing over time?)
F, I did it using the highly scientific method of simply using 5%, i.e. inflation of 3% plus 2%.
Universities will continue to bill students for the full fees each term, and students will pay them (from term one onwards). To do so they will be able to get 100% loans from the government.
But suppose you just want to pay the fees up front out of your own pocket (for whatever reason, including ones that are irrational or economically disadvantageous) what is to stop you? Are they saying you will be forced to accept a government loan and then pay it back under conditions not of your choosing? (Would that get past human rights legislation? Imagine a landlord forcing you to pay rent with money you had to borrow from him.)
CB, you can pay the fees in cash if you want, it's just that if you take a govt loan, there are early repayment charges, that's what McH was talking about.
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