Would you avoid a government loan for university costs?

[thirdhill]

With the proposed funding changes, where repayment appears to be effectively a licence to deduct future earnings, rather than to recover what was borrowed, what would you do?

E.g. commercial loan, mortgage extension, student holiday work, working and saving before course starts, are some alternatives. Or even, as has been experienced in many less developed countries, where future stars live and work elsewhere and avoid repayment.

This is assuming that most people do not plan a future that fails to earn enough of a living to trigger the tax.

Or would you see signing up to having future livelihood taxed as your best option? I'm curious as to how many people will actually find a way of resisting the offer of signing up to extra taxes for their working lives.

Yes the loan can be paid off, including the interest which is 3% over inflation from the first day they handed you the money. So if you had the money already, are you sure you can earn more than 3% above inflation and tax in order to break even? Even ISAs aren't that generous, Lewis says OK you lose some interest - so it becomes a gamble between losing some intereest and possibly never earning over £21k in the next 30 years.

Sure the loan will not be taken into account for mortgage purposes. But which lenders won't factor in the fact that 9% of your taxable earnings are already spoken for, and will simply lend you less?

Based on the putative interest rate and the amount of fees - It's possible Thirdhill to work out the income point where the loan scheme isn't the most beneficial option - but I'd hazard a guess that for most students future earnings will be hard to predict. The 9% becomes onerous if one earns high right away or one earns above the national average across ones career - but as long as there is the possibility to pay it off at any moment without penalty then the risk is minimized. Moreover, unless I misunderstand it is a 9% repayment (not a tax) on oncome above £21,000. I can shave the facts to make the argument but I thought the thread was to edify.

Can I jump in with a question?

DD has a student loan of around 20k. She is earning just below the higher rate tax band. Grandparent has left her 30k in her will. Should she pay off her student loan or would the money be better used as a deposit for a house?

thirdhill - You really need to get your facts right.

Yes, the interest rate is inflation + 3% whilst you are at university. However, once you leave university interest is only charged at the rate of inflation until you are earning £21000. You don't get back to inflation + 3% until you are earning £41000. And even at inflation + 3% it will be less than the interest on most other forms of loan.

You do NOT pay 9% of your taxable earnings. You pay 9% on any amount over £21000. If that is more than the interest you will, of course, be paying off some of the capital, just like any other loan. Or perhaps you think you only pay the interest when you take a bank loan.

If you do not earn enough to pay off the loan within 30 years any outstanding amount will be written off. If you do pay off the loan within 30 years you will stop paying. You seem to imply that you have to continue paying long after you have paid off the capital plus interest. That is simply not true.

Thank you prh47bridge - a really clear explanation!

prh
So whilst you're at university is the interest just charged at inflation?
Thanks.

I do not know if DC will be able to afford to finance tertiary education (if they choose it) by means other than a government scheme.

But if they can, that is what I would encourage them to do. I would even encourage them to take their degrees abroad.

Why? Because the government can change thresholds and rates. They are seeing that principled objections fall away if you position new money-extraction as hitting only the rich (see the CB debacle - unfair step still there and still just as unfair but with bigger numbers).

They are also beginning to attempt retrospective taxation and double taxation.

So I have no faith whatsoever that this scheme will stay anything close to what is currently is. In particular, I think higher earners will in future be required to continue payments well beyond the time their headline figure is paid off. OK, it might never happen, and maybe my DCs will never have high-paid jobs. But yes, I'd like to protect them from as much of this as possible.

nbee84 - I am not a financial adviser and I do not know your daughter's financial situation but I believe most graduates they are best off not paying off the student loan. See here for some advice from a financial website.

ajandjjmum - No, while you are university you are charged interest at inflation + 3%. Once you leave university the interest drops to inflation only until you are earning over £21000.

yes prh there are facts and real life. Firstly thanks for confirming that all the time you have the loan you pay 3% over inflation. Secondly, in RL jobs needing a graduate trained to think and apply judgement including in social work earn over £21k, so all that talk about only inflation after graduation is naive or disingenous. Anyone can read the facts; however making sense of which rules work in RL is what we're trying to do. I will say that almost without fail, prh your advice is top rate, but to focus on those below the £21k threshold is out of character.

No scheme works assuming people won't pay it back, overall it has to balance. So for every person who does not pay it back there will be overpayers. Not to mention the costs of the loan scheme company who certainly won't be working for free.

Anyone who thinks they only pay interest on loans can expect at some point to lose the shirt off their back. Or in this case live for 30 years in relative poverty as a free rider, which I would hazard a guess that almost all young people would find abhorrent. We are talking about the marginal effects between investing in an ISA against taking a government loan. Also the marginal effects of a commercial locan against one that involuntarily deducts 9% of salary [over £21k]. Also assuming that when you borrow you pay back. Otherwise it is easier to borrow and emigrate which is arguably similar morally to being a free rider.

Thereitis I found that playing around with the model shows how much total repayments are against salary and inflation assumptions. So it's easy to figure how the scheme compares to other financing methods.

Thanks to all for sharing your views.

When I paid off my student loan, it was 9% of earnings above a certain amount (can't remember what amount it was then). And once I'd paid it off, it was paid off - I can't see how anyone could overpay to be honest. I do realise the amounts involved will be greater in the future and so it will be take longer to pay it off (assuming a similarly paid job etc) but I really can't see how people would be overpaying.

Thanks prh - I wasn't sure of that.

One thing that bothers me is that whilst £21,000 is a decent salary now, what will it be worth in 10/15 years time. Will this figure rise with inflation, or will it in effect mean anyone earning over (today's) £15,000 salary be charged 9% on the excess?

I'm sure with mine it was 9% on earnings over less than £21k but can't remember what the figure was. I was paying it off during 2001 to 2003 I think.

I guess a lot of people think that when they service and settle their own loan, that has nothing to do with servicing and settling the entire loan scheme including defaulters and operational costs. Not to mention an investment return on the original financing of the scheme, since this would have come from the global market.

Which is why, in RL, fund availability is more powerful a predictor of behaviour than economic rationality.

Have found this old link where it was 9% of earnings over £15k so presume it will change in the future to reflect inflation.

Have found that the £21k starting limit is for courses starting from this September - I presume courses that started before then will stay at the £15,795 a year which is currently is.

thirdhill - I did NOT confirm that you pay inflation + 3% all the time you have the loan. I specifically pointed out that this is wrong. Once you have got your degree you do not get to that rate until you earn at least £41000. If you earn less than £21000 you only pay inflation.

I am not focussing on those below £21000, simply explaining the rules. And this scheme does indeed work on the basis that many graduates will not pay back the loan plus interest. It does not have to balance. Any deficit is funded from our taxes. The student loans company is a government agency, not a commercial company.

You keep going on about the "involuntary" deduction of 9% of salary over £21k. Unless you are earning in the region of £51000+ an unsecured commercial loan of £50000 over 30 years (in the unlikely event that you managed to get one) would involve an "involuntary" payment of rather more than 9% of salary. The interest rate you would pay will almost certainly be significantly more than inflation + 3%.

Let me try a real life example. Let us imagine that you come out of university with a loan totalling £50000 and start on a salary of £25000. Your repayments will start at just £360 per year - less than a single months repayment on an equivalent commercial loan. If we imagine that inflation is 3%, your salary goes up by inflation + 2% on average and UK average earnings go up by inflation + 1%, you will pay a total of £43,760 over 30 years at the end of which the loan will be written off. In real terms you will have paid back less than £24000.

I'm happy to use different figures if you want. But the basic point remains. You are almost certainly better off taking a student loan than you would be using any of the alternatives.

QED - That is correct.

i wonder if therewill be a male-female split eg more women aplying to Oxbridge etc with plans to become a SAHM in the future?

Also looking forward to inevitable shake-up in unis once students realise they are being done - at Oxford, I had 1.5 hours per week of tuition, so at 9K a year for a total of around 36 hours tuition means I was paying not far short of £300 per hour, sme of which was with graduate students (who I know were paid £13/hour by the uni for teaching me!).

I suspect there will be some v peeved consumers aka students if this situation continues...

Also, a move to online tuition at new, globalised tuition shops is on the cards - many top unis already put lectures etc online for free - why pay 9K for a UK qual when you can pay for a less for an international degree delivered into your living room at a time to suit, with no living costs...

We have no choice in our family but to borrow as much as we can, regardless of how it is paid back.

I would prefer to pay back what was borrowed with the appropriate interest.

I don't believe in a graduate tax because higher graduate earnings means more tax is paid already.

I favour a system, however, that encourages students to do lucrative degrees. A failing of any system mentioned where you don't pay back until you earn £xxx means that there is no incentive to consider the employment opportunities before embarking on a mickey mouse degree course.

can't believe it is 9% or anything above 5%. How can they justify this when interest rates are historically low. It should be as low as possible or even interest free.

they have scrapped the grant system.

also the cut off for parents qualifying for state help with finance is ridiculous. we earn a reasonable salary between us but don't have 4k or double if both my dd's are at uni in 2014. all our money is used on living and we are fairly frugal.

what is going on?

What's goin on is that the Lib dems lied and some people were stupid enough to vote Tory.

I voted Tory and I'm not stupid. Far from it.

alemci - 9% is NOT the interest rate. That is somewhere between the rate of inflation and 3% above the rate of inflation depending on how much you earn. The 9% figure is the proportion of your earnings over £21k that is deducted towards paying off the loan. So if you earn £25k you will pay £360 per year regardless of the size of the loan. That is much less than you would pay for a bank loan for the same amount.

Being a government agency does not make the money free. The funding comes at market price, and costs the market cost. There is no innate guarantee that being public or private makes the loan scheme more financially efficient, that depends on many other factors.

The statement that the taxpayer will fund the majority of defaulters/free riders is a little shocking, given the current troubles the taxpayer has in funding UK PLC. It was nice having a ball on the taxpayer up to now, but does anyone seriously think that will continue?

Those of us who can afford to set aside say 9% of salary towards DC's costs may find the loan resistable. Those of us who can't afford it seem to expect DCs to do so. Let's hope they earn a darn sight more than £25k or we'll all have to do with less of other services that taxes pay for, in order to fund the loans they cannot pay off themselves.

This kind of discussion reminds me of a question I was asked a few years ago by some clients. "We're really surprised the UK is in such a mess, don't you save?" Guess we thought and still think the taxpayer will fund it. So if you plan to screw the taxpayer by defaulting on a loan instead of tightening your own belt or doing without, make sure you don't expect any favours from any Government. I don't really think it makes any difference whether people are politically Left or Right, this is very bad manners.

I think this whole thread proves that we need better financial education in our schools. How many times does prh have to repeat - it is not an interest rate of 9%! That's the amount of your salary above £21,000 you pay towards repaying the debt (including capital and interest).

Some of you may be paying 20% or 40% or 60% of your net salary on your mortgage - it doesn't mean that that's the interest rate! Jeez.

But thirdhill has a point; the scheme is actually so tolerant that it can't help but provide a bigger burden for the taxpayer in the future. Shame we're not allowed to suggest that fewer people go to university in the future since the number of graduates appears to outweigh the number of graduate jobs anyway (yes, we need more graduates but not in total and not of every discipline).