Repayable Student Loans? What a revolutionary idea!

England’s system of student financing must surely be one of the worst anywhere. Luckily Brexit is hogging the limelight, otherwise the English student loan system would rightly be seen as the prime example of government incompetence and hubris.

Here is how it works. Students pay back over 30 years what they have borrowed. The repayment schedule is 9% of earnings over a £21k annual salary. Which is in effect the equivalent to additional marginal tax rates of 11.25% for 20% taxpayers, and 15% for 40% taxpayers. (40% taxpayers will effectively be paying 55 pence tax and student loan repayments on every additional £1 earned.)

Yet, this system is vigorously defended at every opportunity by the current “low-tax” Tory government and their ex-partners, the Liberal Democrats. A usurious 6.1% interest rate is supposed to help our youngsters to get a university education, while the government can borrow virtually for free. This high interest rate has to be repaid from the wages of graduates, making them more expensive than they should be to our economy, and reducing our competetiveness in the world.

It is based on the Wonga economy the UK is famous for, the backbone of the pay-day loan and credit card industry, where good borrowers subsidise the ones who will not or cannot pay.

The most recent update to the student loan system – a steep hike in interest rates (valid from this September) is the equivalent to shooting yourself in our own foot. Which will go nicely, I suppose, with the “cutting off nose” Brexit proposed by the most useless government ever. The highest earners are expected to repay up to £40k more in a life-time, while more students will have their student debt spiralling out of control.

Projected Higher Education cost to Government – 1/3 of total cost

The aim of the Student Loan System is to reduce the amount of money the state spends on Higher Education. (Having decided that 1.5% of public expenditure for universities is too expensive and unaffordable for the sixth largest economy in the world!)

In 2017 the total cost of University funding to the state will be £17bn. That government money is (mainly) lent to students to pay for tuition and maintenance. The government expects that only about 2/3 gets repaid, leaving the government with £5.9bn bill to finance higher education.

Other forecasts predict that three quarters of students will not repay their loans in full. Only one quarter will. That is not a debt system. That is a BAD debt system. Where a huge proportion is written off.

All this is based on the Institute of Fiscal Studies report just released.

The IFS predictions could be too optimistic. For example, to fully repay a £50k student loan after graduation, your initial salary of £23k will have to go up by 6.3% each year, after 15 years you will have to earn £58k and after 30 years £145k.

(In order to repay the almost £117k now due in interest and principal over a 30 year period, you will have to earn about £200k before tax.)

So basically, that is some fairly steep salary progression. Yet the IFS believes a quarter of graduates will be able to earn this or more over the next 30 years to repay their loans in full.

Keep in mind that average earnings over last 15 years only increased by 2.3% per year, that is wishful thinking. The IFS does not give us any details how they come to their assumption. So their guess is as good as anyone’s. The safest prediction here would be that the government will yet again undershoot its own prediction.

Sure, predicting anything over a 30 year time horizon is impossible. The IFS admit that forecast are highly volatile: “… if graduate earnings are 2 percentage points lower than expected, the long-run government contribution increases by 50%.” Yet their forecasts make the heroic assumption that 100% of students will remain in the repayment system for the full 30 years after graduating! Really?

 

Real Higher Education cost to Government – 50% of total

So let us settle on this: it well be worse than predicted and that 50% (rather than 1/3) of the loans will not be repaid. Just an educated guess, given that loans become more expensive and wages are not exactly zooming upwards. From a total £50k of loans to a student, the government will be lucky to get £25k back. Plus the interest over 30 years time.

That seems is a fair arrangement.

It acknowledges that benefits of a university eduation are shared 50:50 between recipient and society. So how do we get rid off the state-sponsored Wonga system, and get something better?

Proposal: Loan system which is actually a loan system

The government passes on the benefit of low interest rate borrowing to the student.

It will mean that all students will pay the loan off over a 30 year period. At 2% interest.

What does that mean in practice for a total of £50k loan? Only £25k plus interest will have to repaid.

The student will pay off £90 each month for a period of 30 years.

A payment holiday of up to 10 years is possible.

After 40 years, any outstanding loan is written off.

This means that over a 30 year period a student pays £32,400.

A student who never works after graduation will owe £90,500 after 30 years to be written off and paid for by the government

No matter how much they earn.

Current idiotic system:

A loan of £50 k is taken out, but the interest rate is so high that only £25k + interest is repaid.

That is what the repayments look like.

 

IFS

 

Bottom quintile of students (based on IFS graph above)
Student starting on £22k (after graduation) -> £32k (15 years) -> £48k (30 years) repays £32,000 of student loans, rest written off
(salary increase 2.6% per year – same as average earnings)

Middle quintile of students
Student starting on £23k (after graduation) -> £58k (15 years) -> £145k (30 years) repays £117,000 the full amount of student loan
(salary increase 6.3% / year)

Top quintile of students
Student starting on £29k (after graduation) -> £109k (15 years) -> £?k (30 years) repays  the full amount of student loan

Student who never works after university: £295k cost to exchequer after 30 years.

Summary

Government finances are the same under both system, the existing one and the proposed one. Government pays half of university education, the other half is paid for by the students. Yet the great majority of students will be better off. Only the lowest earners will be a tiny bit worse off. The higher earners will all be better off, so a small tax rise will be possible and fair. That could pay for expected bad debt rates.

And it is easy and affordable. Repayments of £90 per month over 30 years. For every student who took out a £50k loan. What could be easier and fairer than this loan system? Graduates will receive loan statements after they start earning which will go down in amounts outstanding, rather than ones which will increase. There will be less bad debts, and more sanity.

So why are we burdening our kids with the crappy system we have at the moment?

Make it a straight minimum interest loan.

Or better still, the government should hike corporation taxes a tiny bit, and pay for all of university education. After all, corporations are the main beneficiaries of our graduates.

 

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