Should you repay your student loans early?

 

 

The previous blog post explained the benefit from a 50k gift, interest free loan, or 3% loan. If you do not expect to earn enough over the next thirty years while you are working it is better to take a student loan. Then the repayments on the student loan are lower – no point borrowing money elsewhere. You would pay back more.

The same is true for early repayments. If you earn over a certain amount, it makes sense, otherwise do not bother. Your student loan repayments over the term of the loan will be less.

However, even if there is a tiny amount outstanding on your student loan, you are still liable to repay the student loan repayments. So if you want to benefit from an early repayment you really have to clear the whole loan quite quickly, repaying everything, to stop being charged further student loan repayments.

Now here is the magic number for repaying your £50k loan early:

Over the next 30 years you would have to earn approximately £1.6 million. That is a £28k starting salary, going up by 4% each year. The more you earn, the more it becomes attractive to repay early.

Here is a table to summarise all that information. (Gifts and loans were discussed in the previous post)

Decision Table
So if you expect to earn more than £1.6m and you have some spare money, repay early.

But only if

(A) the sum repaid to clear the student loan completely IS SMALLER THAN
(B) the sum paid to pay all remaining student loan payments over the rest of the term.
Remember:

When calculating these figures you will have to adjust each annual payment to account for the inflation up to then.

At £1.6m it only just is worthwhile if you repay it within the first 5 years of graduation. And at higher earnings level, too, it would be most beneficial to repay as quickly as you can.

 

 

There are three further points to add:

(1) Time value of money

 

Would you rather have £50k today or £100k in 30 years time? Clearly £50k now, as in 30 years you might be dead. However, adjusting for 2% inflation £100k will be worth only £55 in 2047. So purely from a financial point of view you should probably take the £100k then, rather than the £50k now.
For repaying loans the time value of money works against you. To repay £55k in thirty years time you would need £100k now.
Others, like Martin Lewis, might advice against repaying early, as you might have use of the funds for other purposes. Here we just assume you have enough money to repay early or not. Should you repay the loan, purely from a financial point of view? (The alternative would be to use the money to supplement your income.)

(2) Who will get really stung by student loans – and lose out from early repayments?

These are the students earning from £1.6m to £2m over 30 years.

 

Middle Earners

 

Only students earning of around £2m will through normal student loan repayments clear their debt. But it will make sense to do so early from £1.6m earnings onwards, as the projected loan repayments will be more expensive than the early repayment.

The problem with student loans is that the interest rate is extortionate. The government borrows for virtually nothing, and it lends money onto students at 6.1%. That means that unless you tackle your student loan early, will make it impossible to repay past the first few years. It would cost more after a few years to repay  than staying with the Student Loan Company. The accumulation of interest and low regular student repayments at the beginning of 30 year repayment period work against you. Unless you earn more than £55k, the interest at 6.1% will exceed your repayments from a normal student loan. Until you earn more than that, your loan will keep going up and up.

So most students who would benefit repaying early will be caught out. Uncertain if they will earn more than £1.6m they will probably stay in the student loan system in the beginning. Now they could be stuck, due to high interest rates. Should they end up with just under £2m earnings they pay close to £200k gross of their earnings to have £120k net just to clear interest, repay loan and still have a tiny bit of student loan left, which will then get written off.

 

Even at £1.6m earnings they need to earn £142k gross to repay £85k.

It is these middle to high income earners who will now subsidise the student loans system on behalf of their lower earning graduates of their class.

 

The government estimates the benefit to graduates of a degree to earnings of about  £210,000 on average. It is worth noting that advantage is largely eroded for the middle to higher earners by these large contributions to the Student Loan System.

 

Let us be clear:

The students who had rich parents never will have had student loans in the first place.

The students who will become really rich quite quickly (earnings over £2m, or good potential to exceed £1.6m) will quickly bail out from the student loan system, not wanting to subsidise the low earners.

It is the middle to high income earners who to an overwhelming extent finance the student loan system.

Another study comes to similar conclusions.

 

(3) Will £21k thresholds be increased

As rich students bail out from the system as early as they can, the remaining students will have to come up with an even higher proportion of the total to repay. As that becomes apparent, the threshold of £21k at which students will repay is very unlikely to be increased. The government wants more money to meet an increasing shortfall. Increasing the threshold would mean less money.

 

Summary

  • It makes sense to repay £50k student loan early from £1.6m earnings upwards
  • Most students will not make decision early enough to repay straight after graduation, impossible to repay later as that extortionate interest will make it impossible afterwards.
  • Student Loan System is underpinned by medium to high earners, it is them who pay through the nose to subsidise their lower earning graduates in the same peer group. By paying  more than they should due to usurious interest rates, they are forced into a system which punishes this sub-group of graduates at the expense of very rich, and very high earners.
  • The highest earners can bail out early and only subsidise the students on low earnings to a tiny extent.
  • The richest students, who did not need to take out student loans, do not pay anything to subsidise the student loans system.
  • Thresholds of £21k unlikely to be increased as greater shortfalls become apparent as really high earners bail out early
  • If you owe less than £50k on a student loan, the total 30-year-earnings at which it becomes sensible to repay early falls, of course. Conversely, if you owe more than £50k, than you would have to earn more than £1.6m in the next 30 years before it becomes sensible to repay early.

Expensive Student Loans? Or cheaper alternatives?

The previous blog post showed you how much more expensive it is to take out a 6.1% student loan from the government compared to a 3% loan. That is due to higher interest rates, taxes, national insurance and additional student loan charges.

Students should therefore, before taking out a student loan, consider some alternatives:

There is a myth out there that the cost of the student loan repayments do not matter, as most students will not clear the outstanding debt anyway. That is wrong.

If completely clearing an alternative loan is cheaper than even partial student loan repayments, that alternative loan should be considered.

Assume you are a student and have three options to pay for the £50k cost of university:

 

  1. Your uncle offers you £50k interest free to be repaid in equal instalments by you over 30 years at £139 a month.
  2. Your dad says he will put £50k on mortgage at 3%, to be repaid in equal instalments by you over 30 years at £186 a month.
  3. You take out a student loan

 

So how much do you have to earn if you take up which options? Remember, it is only your earnings which will determine your repayments for the student loan company.

(we assume here that neither the £21k repayment threshold will change, or any other tax thresholds will change relating to loan repayments)

Option 1:

Take your uncle’s interest free loan if you will earn more than about £1.15m over the next thirty years. That is £25k starting salary, rising by 3% each and every year. If you expect to earn less, take the student loan.

Option 2:

Take up the offer of your dad of the 3% loan if total expected earnings are more than £1.45m over the next 30 years. That is either

– £28k starting, increasing each year by 3.5%, or

– £30k starting, increasing each year by 3%.

Option 3:

Take out a £50k student loan if you expect to earn less than either £1.15m (if you have a rich uncle) or £1.45m (if you have a helpful dad).

Or even take out a student loan if you earn slightly more than that and you value the flexibility of not having to repay in years when you do not earn.

Other things to consider:

Will repayment thresholds be increased?
If you are convinced that the government will increase repayment threshold of £21k levels upwards, or increase earnings limits, the student loan will become much more attractive than the alternatives. If the government did, you will have to earn more over the next 30 years, perhaps £200k or more (on top of the £1.15m or £1.45m) before it will become cheaper to take your uncle’s or dad’s loan.
However, since student loans were introduced, loans have become bigger, more expensive, with thresholds retrospectively frozen until 2021. So why would the government change it now back into the other direction? Especially since the Student Loan System is desperately trying stay afloat and reduce government contributions at the expense of students’. A sceptical and prudent approach is therefore justified. Assume the government will not increase thresholds.

Risk that government will change conditions to student’s disadvantage

The government considers the government debt only being repayable through earnings. But that law could be changed. Terms and conditions have been changed before for previous loans. Perhaps the government will make a student debt more like a real debt, where debt collectors can and will chase you to enforce repayment. Perhaps worldwide. There is no guarantee. In future you might get a visit from thebailiffs for missing a student loan repayment – even if you are unemployed – you never know what a government will legislate for. The student loans will certainly be sold off to a private company, they have with all existing tranches.  There is no guarantee that the government will continue to be as lenient when pursuing you for your debt, or that a private company will do so in an ethically appropriate way. Do not forget that directors of the Student Loan Company have in the past been sacked for unethical behaviour.

In total, be aware that students are asked to subscribe to a Student Loan System which will probably be changed significantly. And as the government will be short of money, it might well be that it will try to enforce the student debts as rigorously as it can.

Consider a possible change of government

Remember also, student loans might be scrapped (Labour) or increased retrospectivly to the students’ disadvantage (Tory government).

Should you partly repay outstanding student loans?

This is important: once you decided to take out student loans there might not be any point to repay the outstanding balance. Only pay it back if the sum to clear the Student Loan Debt completely is less than the sum of annual repayments you would have paid if you had stayed in the Student Loan Company.

For example, 20 years after taking out a student loan your godfather might offer you to repay part of the student loans with a £50k gift. Check if it is worth it. You might repay less over the last remaining 10 years as part of student repayments.

What if you earn very little

Even if you only start on £21k and increase earnings by 2% per year you will end up earning £850k over 30 ears. You will only repay a fraction of the original £50k loan and no interest.

What if you earn a lot

You will repay all the £50k student loan and accrued interest, only if over the next 30 years you earn £2 million or more. You will if you start on £30k and your increases are 5% a year.

Should it transpire in future that you will earn £2million, but decided to take out a student loan rather than take up your dad’s offer you lose out. You will lose out by an enormous amount. You basically spend a lot more money (tens of thousands of pounds more) on your student loan repayments than you would have done had you earned £1.45m and taken out a loan from your dad.

Summary

You might be better off using alternative financing, either by getting a gift or an interest free loan (if earning over £1.15m) , or a very low 3% interest loan (over £1.45m).

That is true EVEN IF YOU DO NOT REPAY the full student loan.  The only thing which matters is how much you earn. That will determine your student loan repayments, and even at medium earnings you will be better off financially taking out an advantageous loan, should someone offer it to you.

When comparing loans it is no good just to compare cash repayments amounts, but it is important how much extra you will have to earn to pay the student loan repayments, or any other loan arrangement over the 30 year term. So gross wages –  before taxes and student loan repayments are important

Gross wages are your only source of income to repay any loans. As we said before in the previous blog post, to pay £1 of loans to the student loan company, you will have to earn £2 if you are a 40% taxpayer and 9% towards your student loans.

To earn £1.15m or £1.45m over 30 years, the salaries and salary progression look very average. In today’s money, that would mean salaries of around £33k or £42k at end of your thirty years, respectively. If everybody had access to these cheap funds, a higher percentage of students could repay their loans. (As a reminder, the Institute for Fiscal Studies suggested that under current student loan system 3/4 of students will not repay their loans fully!)

The usual provisos apply. If you do not work the full 30 years (career break, unemployment, illness) the student loan might be more advantageous. Although your uncle or dad might also let you off the hook should disaster strike.

No rich uncle or helpful dad?

And finally, what if you do not have a rich uncle or a dad willing to put £50k on his mortgage?

Let’s face it, that’s probably the majority.

Do not worry about it – take the student loan and repay as advertised. You now know that even people whose studies are paid for by a interest free loan or 3% interest loan need to earn about £1.15m or £1.45m before they actually get a financial benefit from these loans.

On the other hand, assume you and your friend both expect to earn £1.45m. But your friend had a helpful dad who paid for his studies with a 3% loan. Anything you can do to cut the cost of your repayments?

If you start on £28k and your salary increases by 3%, in 5 years you will have earned £150k. If you manage to repay your £50k (plus accumulated interest) student loan from these £150k earnings, you will save about £117k in future student loan payments (from your gross earnings). That is £117k, that is the money you do not need to earn to pay the Student Loan Company for the next 25 years if you manage to repay after 5 years. You will have that as additional gross salary.

Assuming your friend still has the loan from his dad, he will have to repay £61k from his gross earnings over the next 25 years.

That is what you should remember:

You should always try to clear the student debt, if you can, if the sum needed to clear the loan completely is less than the sum needed to repay your projected student loan payments.

Best would be not to get into too much debt in the first place, of course. Earn as much as you can before or during studies, borrow as little as you can. Think about delaying university entry for a year to earn some money. You might still need a student loan, but if it is £25k than £50k it is a lot easier to clear from your expected lifetime earnings. (If you expect to earn very little over the next thirty years, maybe constantly below the £21k payment threshold, you should, of course, attempt to borrow as much as possible really)

So clear the high-interest student loan as quickly as you can. It might be possible

 

  • if you still live rent-free at your parents’ house,
  • if you have a loan which is smaller than the maximum allowed,
  • start early after graduation,
  • and keep going without fail to do so, within the first 5-10 years if you can, or quicker, to make it worth while.

If you fail to clear it fully, you will still owe the full student loan repayments, even if you only owe £1.

It will cost you less, to clear it quickly, for two reasons:

(1) Interest will not accrue as quickly and (2) you are likely to have much lower tax rat, making repayments significantly cheaper.

Your granddad gives you a gift of £50k to pay for your education

Should you take a gift of £50k? If you expect to earn more than £1.15m, definitely. You expect you might earn less? If you expect to earn a lot less, perhaps having no intention to work, do take the maximum student loan. And use the £50k gift to supplement your income once you work.

If you expect to come close to the £1.15m over the next thirty years, but not quite over the full amount, the advice here is to take the money anyway and use it for your education.

It will save you to be in debt servitude to the UK government for the next 30 years, like some medieval peasant. You will avoid demoralising student loan account statements which will show increasing loan balances despite steady and costly repayments. Crucially, it will allow you to keep more of your earned money for yourself, reducing your tax rate by 9 percentage points, as you do not pay depressing and punishing marginal tax rates of 41%, or even 51%.

 

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If you think that this level of sophistication and number of uncertainties are absolutely ridiculous for 16 or 17 year olds to consider, you would be right.

You would also be right in thinking it has been made complicated on purpose so that investment banks can come in and scalp the government when buying the existing student loan books, as is planned. And therefore earn money and profit from these high interest student loans – at the expense of students and taxpayers.

It is equally ridiculous that good student loan advice is not available on a government website. Or that no sophisticated repayment calculator is available which would show how the above calculations have been derived. So that students and their parents can make informed decisions.

The most astonishing fact, though, is that you are entering into an Student Loan agreement with the government, and the government has the option to change the terms of the agreement and the cost for the service/loan it has provided – in retrospect! You would not enter into any other commercial agreement on that basis. But here you are supposed to just sign up to a 30 year agreement for which you do not know the most basic conditions – such if the £21k threshold will be changed or not. You have got to be kidding.

Student Loans Company Loans – another financial scandal, this time instigated by the government itself! And let us be specific, in its current disastrous form, introduced by the Conservative government and the Liberal Democrats.

Appendix:

The summary of these figures now in graph format:

 

St_Lns_By_Inc2And here is the data for the chartst_ln_Data

NPV is the net present value, the 2017 cash value of any money value in the future.

Let us take the £1.15m total earnings as an example. That would be a £25k starting salary, growing by 3% each year, all added up after 30 years. The sum of 30 years worth of salaries is £1.15m.

Your annual salary in 30 years time, adjusted for the net present value should be

£25k times (1.03 to the power of 30) divided by (1.02 to the power of 30) = £33.5k

The NPV uses as a discount value 2%, as it is assumed that 2% return can be achieved over the next thirty years on average on an investment.

Please note that should the government decide to increase the threshold of 21k, the green line in the graph should move downwards. But the slope would stay the same.

 

 

 

 

 

 

The real cost of student loans. It’s the gross income which is relevant!

Any parent currently thinking about sending their kids to university will want to know if it is worth it financially.

Advice is hard to find. On the one hand 1/3 of students regret taking their degree and 50% regret getting into student debt. On the other hand students are encouraged to take up the loan, £50k (or more) as the “real cost” are only 9% of earnings over £21k. For the next 30 years. If it is not repaid, it will be written off by the government.

If you do not have any other source of finance and want to go to university, you do not have a choice but to take out the student loan.

On the other hand, what about the many students who enter university from fee-paying schools? Their parents will have paid for their schooling, and could now pay for their university tuition and maintenance. Unless rich parents believe their children will do substantially worse than themselves (their offspring might prefer to hit the surf or the slopes rather than work in the UK) they will presumably consider paying  for their university tuition fees.

And it makes sense. If you have to earn money to repay the loan, you will always have to pay tax, student loan repayments, and interest. So you have to earn substantially more than £1 to repay £1.

Example 1: £10k loan interest free.

What will it cost to replace £10,000 of tuition fee paid straight  by the parents.

Even if the graduate were to repay the £10,000 straight away after graduation, assuming 0% interest, the graduate would have to earn

£14.7k (basic rate taxpayer)

£17.2k (higher rate taxpayer)

Because the marginal tax rates are

basic: 32% (20% tax and 12% National Insurance) (so £10k/(1 – 0.32) = £14.7k)

higher: 42% (40% tax and 2% NI)

 

Example 2: £10k student loan is interest free but follows student loan repayment regime:

To repay £10k of student loans using the current repayment scheme (9%) you would have to earn

£16.9k  (basic rate taxpayer)

£20.4k  (higher rate taxpayer)

The marginal tax rates have now increased to

basic: 41% (20% tax and 12% National Insurance and 9% Student Loan Repayments)

higher: 51% (40% tax and 2% National Insurance and 9% Student Loan Repayments)

 

Example 3: Assume £10k is borrowed as part of a 3% mortgage, and will be repaid in a lump sum either in 10 years, 20 years or 30 years.

We also quote figures after adjusting for a 2% inflation rate. That means that 102 next year (and so on…) is the same as 100 today. So all amounts quoted can be compared to money today. All amounts are earnings before tax.

So in £10 years time you would have to earn £16.2k (basic) or £19.0k (higher)

In 20 years £17.9k (basic) or £21.0k (higher)

In 30 years £19.8k (basic) or £23.1k (higher)

to repay the loan. Marginal tax rates as in Example 1.

Example 4:  Assume £10k is borrowed as part of a 6.1% student loan, and will be repaid in a lump sum either in 10 years, 20 years or 30 years.

We also quote figures after a 2% discount rate. That means that 102 next year (and so on…) is the same as 100 today. So all amounts quoted can be compared to money today. All amounts are earnings before tax and student loan repayments.

So in £10 years time you would have to earn £22.9k (basic) or £27.7k (higher)

In 20 years £31.1k (basic) or £27.6k (higher)

In 30 years £40.2k (basic) or £51.0k (higher)

Marginal tax rates as in example 2.

These are now summarised in a table.

To repay £10k you will have to earn:

 

 

£10,000 standard rate —————– higher rate ———————-
1. Repayments £14.7k £17.2k
2. Student Loan No Interest £16.9k £20.4k
3. Loan at 3% £16.2k £17.9k £19.8k £19.0k £20.1k £23.2k
4. Student Loan at 6.1% £22.9k £31.1k £42.2k £27.8k £37.6k £51.0k

Summary

Because of tax, National Insurance and student loan repayments, you have to earn more gross to be able to repay net. If your gross earnings are your only expected income, so that is the right way to look at it. How much extra do you have to earn gross to repay £10k? The minimum is £14.1k , even if you get the loan interest free. Remember, figures in example 3 and example 4 above have been adjusted to compare to £10k today. So even though the loan goes up by 3% each year “nominal” we adjust for the fact that inflation is 2%, to give us the “real” amount. That is the only way to compare these figures.

Student Loans are the most expensive to repay when compared to other loans – up to 2.5 times more expensive when repaid after 30 years (£51k) compared to a 3% loan repaid after 10 years (£14.7k).  (Note: Nobody repays £51k in student loans in one year. But the relative costs are still the same. So £1k loan needs £1.62k in repayments after 10 years (3%), compared to £5.1k in repayments in year 30 of student loans.)

Sure, you might not repay all of your student loans, but even if you repay just 90%, 80% of them, the cost will be more than a regular low cost loan.

So why do students not take up loans other than from the student loan company? Or why do parents not pay for their children if they can afford it? Surely it will be cheaper in the long run. Or will it? Some think not.

The next blog post  tries to go into more details:  Gifts from parents, interest free loans, and very low interest loans would possibly be worth it. Compared to the expensive official student loans from the Student Loan Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

Oh….Jeeeeremy….Cliiiiif…fe!

Increase housebuilding by a factor of 6, build more railways, bring in Land Value Tax and abolish VAT

Jeremy Cliffe, the Economist’s correspondent in Berlin, tweeted his own radical ideas for the British economy, after complaining that the Jeremy Corbyn Labour programme is anything but.

What looks like a list compiled during a long boozy summer afternoon in a German beergarden is superficially attractive. Taxing wealth, rather than income or consumption, and improving Britain’s infrastructure through a massive building programme for housing and railways is the economic mainstay of this plan. And something you will not see in the Economist, which will prefer to tell you that markets and free trade solve virtually all of societies’ ills.

So, a radical programme for Britain! Just the kind of thing this blog loves to review.

Let’s check out four of the main ideas:

1) Build 1 million houses per year for 5 years

That certainly is ambitious. Last year about 170,000 were started. So this proposes to increase housebuilding 6-fold.

Over 2 milllion people work in construction, and its current part of GDP is about 6%.

Clearly, even if only half of these workers are employed in housebuilding, we will not find another 5 million construction workers to build 6 times more houses than we do now.

It’s radical, but completely impossible to build 1 million houses a year. The workforce is just not there. Five million extra construction workers could not be imported, or trained.

Further, house builders would suffer and not allow it. The market would collapse, if all of a sudden 1 million additional houses would be offered. Falling prices is not in the interest of developers, who currently make sure, given their oligopoly, that the supply of new housing is strictly limited.

 

2) Reduce VAT and bring in Land Value Tax

Currently VAT brings in about £120bn a year.

Land Value Tax, which would presumably replace council tax and business rates, would have to be introduced. These two taxes currently amount to about £30bn each.

Abolishing VAT, council tax and business rates and bringing in Land Value Tax (a property tax) would make taxes more progressive. Poorer people pay less, and people with lots of land and property (especially in the South East and London) pay a lot more.

However, to move all of current VAT income onto Land Value Tax would roughly triple the current cost of your council tax/business tax (on which land value tax would be based). Not a very simple thing to do, certainly not very popular in the South East. But perhaps possible gradually over a longer time frame.

3) Move to higher inheritance tax, and reduce income tax

The problem here: inheritance tax income is £5bn a year, and income tax £180bn. So the government could double inheritance tax, which would annoy almost everybody, but income tax would hardly budge.

4) More new railways

If more high speed rail lines, either suburban, or nationwide represent value for money (as opposed to extra spending on health or education) would have to be investigated. I doubt it. And again, there will be a lack of builders and engineers. So sorry, trainspotters. Not a good idea.

 

What would be radical, but what is not mentioned?

1) Carbon tax instead of National Insurance
2) Transaction tax (including, but not exclusively, on financial transactions)
3) Green Quantitative Easing
4) Increasing services on existing railways/public transport and giving incentives to use them
5) rental income taxes

 

But that is just some of my ideas.

Soros on my side, but economists I respect say LEAVE

Spookily,  a couple of day after I claimed on this blog that it would be economically foolish to leave the EU,  George Soros claims the same, citing pretty much the same reasons to my own, in the same order.

  1. UK currency could fall in value, making it poorer
  2. huge current account deficit means UK is in weak position
  3. manufacturing sector is unable to prosper following Brexit

On the other hand, some economists and economic commentators whose opinions I generally like and trust all suggest to vote for Leave.

Yesterday Professor Richard Werner stated his reasons, pointing out Norway and South Korea can prosper, and that the EU is a part of the USA’s sphere of influence which is likes to control and also covertly finance. The EU’s have recently, under the influence of the USA, led to economically counter-productive sanctions on Russia.  And the EU has not learned from the Eurocrisis which it was barely able to resolve.  The EU thinks future integration is the answer. The five Presidents’ report makes that clear – the wrong recipe, thinks Werner.

Professor Steve Keen also states his reasons for leave, citing the problematic Euro currency area and undemocratic nature of the EU, and the Eurozone’s insistence on budget surpluses , which cannot work.

Larry Elliot in the Guardian sees the treatment of Greece and the unflexible Eurozone elite as problems, and does not believe a democratisation, as envisaged by Varoufakis would work.

And finally, Ambrose Evans-Pritchard, from the Daily Telegraph, who, albeit only reluctantly voting for Leave,  cites a democratic deficit, and a abrogation of national law to the European system and European Court of Justice as his reasons.

So all of these commentators list valid and thoughtful reasons why the EU is not working well. It is irredeemable, and people should vote for Leave. I disagree, although the deficits of the EU are blatantly obvious.

As I said before, for me the inability to tackle unemployment is the over-whelming indicator of the EU’s failure. (The critics above also see that as a big problem). The ECB currently prints money, Euro 80 billion a month. Instead of using it fight unemployment, it buys bonds from governments and corporates.

The EU Juncker fund, a Euro 315 billion investment fund launched in November 2014, to spend that money to fight unemployment seems to have been singularly ineffective. The money was to be spent by the end of 2017. Where is it? Unemployment rates of 20% in the South of Europe, with youth unemployment at up to 50% remain a symbol for the failure of economic policy within the EU.

If you think that this will always stay that way, and there is little to no chance of redemption, as the critics of the EU above might think, vote for Leave.

If you believe, as I do that, eventually, the right policies will be taken to tackle unemployment (more balanced trade and less balanced budgets and employment programs) vote Remain.

Voting Remain will not endorse the draw-backs highlighted by the critics above. It will give us a chance to influence the EU (by influencing our government which influences others) and change them.

 

 

 

 

 

 

 

 

A Brexit vote will not mean Brexit

If we want to keep peace, influence and a healthy economy, we should all vote for Remain.

1) Peace

Millions died in wars in Europe over centuries. Since the creation of the European Union, former enemies have become friends. They have remained friends since, and 28 nations now are part of this club. More want to join this club which is built on co-operation and compromise.

The European Union is not the only guarantor of peace, but it is an important element.

2) Sovereignty and Influence

Clearly, most sovereignty can be exercised by staying part of a club, where European governments meet on an almost daily basis (different parts of government, of course) all aiming to enhance the well-being of its citizens.

Democratic deficits in Europe? Yes sure, too much power, perhaps, for the Commission, and “Five Presidents”, none of whom has been elected directly by the people of Europe. And the EU is too easily captured by lobby interests of industry and neo-liberal agendas. But that is true of most national governments.

But, by leaving, that place on the top table goes. But rules and regulations, as Switzerland and Norway find, have to be adhered to.

The EU is an institution where compromises are made and deals are negotiated. None have directly caused any harm (the high unemployment in the South of Europe is an exception), all have essentially as an aim to make us wealthier and cooperate with each other. An element of solidarity, to help the poorer nations is woven into the fabric of the EU. All agreements and treaties been entered into in good faith by the parties making these. The UK, as the second biggest country in the EU, has major influence.

Why give this influence up?

3) Economy

The UK is the fifth biggest economy in the world. But if the value of the pound falls by only 10% after a Brexit, it becomes the 6th, after France. If the £ falls further, by one third (much less likely), the UK could fall behind after Italy and India.

The advocates for Brexit promise a land of hope and glory devoid of manufacturing and based mainly on services (according to their loony economist Professor Minford). This is to negotiate trade deals all over the world more beneficial than what is on offer now.

Let us be realistic. The UK lives at the moment by selling its real estate to foreign tax evaders who buy up London where supply is artificially restricted by the government. That finances to a large degree the largest trade deficit of any economy anywhere at about 7% of GDP. The reason that deficit is so big is because the UK’s entrepreneurs and industrialists cannot provide sufficient goods and services which the rest of the world wants to buy. They are insufficiently competitive on the world market, compared to, say, Germany or China. Trade deals are irrelevant here.

Further, the historic track record of the UK coming to negotiated beneficial trade terms is poor.

a) It is hard to pretend the slave trade was based on negotiation.

b) England went to war with China to sell it opium – enforced trade by gunboat diplomacy.

c) Later it lost control of its colony in America, which did not like the fact that they had to pay duty on the tea which the English traders sold it. Another trade deal gone seriously wrong.

d) And more recently, having had the Empire or later teh Commonwealth as a virtual captive markets for its industrial goods, the UK  nevertheless managed to lose all its competitive advantages in its former colonies, rather than become a major supplier of cars, trucks or machine tools.

But all of a sudden now trade is to flourish, based on new trade terms with the rest of the world, whilst rejecting existing terms with our biggest trade partner, the EU. That is sheer lunacy.

Only fantasists and propagandists like Gove and Johnson believe that Brexit will be good for the economy and trade, to tear up existing arrangements which firmly embed the UK in Europe. It will prove to be impossible.

We will have an arrangement, at best, like Norway with the EU. All the cost, all the immigration, but none of the sovereign decision-making.

How does that take back control? If people want to vote for Brexit, brainwashed into believing by a jingoistic press that this is in their favour, fine. Risk peace, good-will, co-operation, and the economy, by all means, if you are foolish enough.

What to do if there is a Brexit vote? Kick it into the long grass

What should David Cameron do if there is a vote in favour of Brexit? He should not resign, as no leader should resign in a time of economic danger to the nation.

But he cannot immediately start Brexit procedures. About 172 Tory MPs are for Remain, with only 132 for Brexit. And the rest of the House of Commons is mainly for Remain.

MPS

So, no Brexit vote could muster a majority in the House of Commons.

Cameron will not risk  a General Election, so a Brexit will have to be postponed. Which is just as well, as the proposers of Brexit have not been able to say in detail what a Brexit will look like. Cameron could rightly say that the country has no plan for Brexit, no plan on “how to take back control” and the Brexit plan has to be drawn up first.

So Cameron could set up a “Brexit Commission” to look in detail at the feasibility of Brexit and provide the country a framework which it could possibly vote for at the next general election. This  commission (made up of  Gove/Johnson/Patel/Grayling as well as employer, union and other NGO representatives) is to report in 2019.

It would have to liaise with the EU and other countries, so see what deal would be possible. It is to set out a detailed change to the current immigration system, to see if that would meet the needs of the nation and the electorate taking into account the rules of the EU. And the Brexit Commission would need to specify where exactly the sovereignty of the nation is hindered by the EU, and where it is enhanced.

We will find that a Brexit plan will be lunacy and not enhance power or wealth of the UK. Nor will it reduce immigration. Nor will it “take back control”. A Brexit plan will not be part of a Tory manifesto for 2020.

So the Brexit plan will be quietly shelved, along with Gove and Johnson. They can then join UKIP , if they want.