Why are student loans set above base rate?

[DangerMouseAndPenfoldx]

Just that really. Why are student loans set above base rate?

The company who runs them (or the government - I don’t really know how it works) are making a profit from them. And continuing that profit for the decades it takes to pay them off.

I guess it’s because some of them won’t be paid off, so the ones who pay them for years are subsidising the ones who don’t ever earn enough to pay?

@Talkinpeace 70% of people are expected to earn enough to pay back their full student loan. Your argument only holds for the 30% who are not expecting to clear it.

@DangerMouseAndPenfoldx
On the currently issues series of loans maybe
but the last two series repayment has been estimated at 25%

Its hard to pay it off if the interest is greater than the amount repaid each month

Its hard to pay it off if the interest is greater than the amount repaid each month

Yes, that’s exactly my point. The argument that “it doesn’t matter, it’s just a graduate tax” doesn’t hold if you are paying interest for donkeys’ years, and therefore paying back multiples of the original loan.

The only reason the new loans are expected to be paid back by 70% of people is because they have increased the payment term.

Graduates are just being milked as cash cows.

If they really think that people in their 60's will be earning more and thus enough to clear the loans, they are deluded

@DangerMouseAndPenfoldx what would be your preferred way of students paying for higher education? Given that universities are already struggling. I’m not goading, I’m interested. I think it’s very difficult to think of a workable solution.
A graduate tax (or loan) needs to pay back what was borrowed and it needs to be index linked in order to do that. There’s also a lot of talk of needing to increase the fees (for university) and increasing the maintenance loan in line with cost of living. Both of those would mean a large increase to the loan/graduate tax ‘debt’. Thus making those payback figures even scarier. But someone has to pay for students’ degrees and if it’s not the students it’s the general tax payers, and no one likes tax increases either.

How does the threshold work?
At the moment is barely above minimum wage (for a FT job). In 3 years time when it starts being paid off it will be even closer, in 10-15 years time it will almost certainly be below minimum wage....?

Student Loan Company

We are a non-profit making government-owned organisation that administers loans and grants to students in colleges and universities in the UK.

https://www.gov.uk/government/organisations/student-loans-company

However, that doesn’t really tell the full story because the money they administer is provided by private investors.

@NotDonna I don’t have an issue with the concept on loans, but I think the interest rate is artificially high.

At risk of being overly simplistic:

Mortgage rates are less than student loan rates, and there is still profit being made there.

A 10 year government bond (approx cost of government borrowing) is currently 3.9%, which is considerably less than student loan interest rate of 7.3%.

The idea that it has to be linked to inflation so that it’s “the same amount in real terms” is spurious. That doesn’t happen with other loans.

Surely it is so high to compensate for the number of defaulted loans?

And there are so many defaulted loans because the degrees aren’t worth their cost.

How do you value the worth of a degree?

However, that doesn’t really tell the full story because the money they administer is provided by private investors.

It really isn't. Unless you're counting tax payers as private investors....

Yes, it seems my information was out of date. Historically, the loans were sold to private investors but that is not the case now.

Yes, it seems my information was out of date. Historically, the loans were sold to private investors but that is not the case now.

Well you said the funds were provided from private investment which has never been the case.

There were two loan sell-offs, possible because the Gov did a very sneaky accounting sleight of hand and put the loans in the assets side of the balance book. When this was recognised as the swizz that it was they quietly moved them to the liability side, meaning sell-offs were no longer possible.

Compound interest is charged from the day you receive the money, added monthly.

If you borrow £9250 for fees in Y1 you receive
£3,083.33 around 1st October
£3,083.33 shortly after 1st January
£3,083.33 in mid April after Easter.

If RPI is 6% throughout (for ease of maths) then roughly £15/m is added at the end of oct, nov & dec; roughly £30 at the end of jan, feb & mar; and roughly £45 at the end of Apr-Sep.

Actual figures will be a bit different. Obviously it accelerates even faster once in y2 and y3. By the time a graduate might reasonably start work in the august after the end of y3, although the fees totalled £27,750 the loan including compound interest is in the region of £30,500. At that point if the graduate is earning enough that their 9% in excess of the threshold is greater than RPI% of the amount owed they will start to pay down the debt, otherwise it will continue to increase. This balance point for if the loan was fees-only and the graduate gets a job at this level immediately is about £45,000.

If they had to borrow for living costs too the balance point is much much higher.

All these figures will vary according to what RPI does but the vast majority of graduates will simply be paying the 9% as an extra income tax for 40 years and will never pay it back.

How much can you earn with that degree on your cv, all other things being equal?

Without being esoteric, if a student earns a degree while accruing debt that they will never be able to clear, then I think the value degree of the degree wasn’t equal to the cost.

BrokenSushiLook Thank you for that. I find it shocking that by the end of their degree students have accumulated nearly £3000 in interest charges on the fees alone (if I've understood that correctly).

When I was looking for figures I found this. The most worrying thing is that apparently the government can change stuff like the payment threshold whenever they like.

Martin Lewis' 6 need-to-knows about 'Plan 5' English student finance (moneysavingexpert.com)

Huge loan plus long repayment makes it a crazy catch up game.
Would a student who expects to pay it back be better taking a commercial loan over a shorter period? More risk but potentially better off by mid life?

Avoiding the debt by working before and during degrees will be more common. Along with part time degrees. Only the rich will be able to graduate at 21.

I think we as a society have to decide what the purpose of a degree is. A lot of so-called ‘graduate jobs’ could be done by bright non-graduates. Equally, there are many jobs where a relevant degree is vital (eg medicine). Is the value of a degree solely in the academic education it provides, and the increased value of the knowledge and skills of the student? If so, we don’t need as many people doing degrees as we have at present, as many jobs don’t actually NEED junior candidates to be degree qualified, despite asking for it. Companies could go back to training people from the age of 18 upwards, and degrees could be retained for those areas that require it, perhaps at least partially funded by Government (or indeed wholly depending on the cost), and those where enough students (or their families) are willing to pay without Government support. Anyone else would go the apprentice / training in the job route.
If on the other hand the value of a degree is more than this, for instance in the teaching of soft skills, as a jumping off point for adulthood, as training in analysis and critical thinking and how to learn, this may be something we as a society would benefit from most people doing. If that is the case, should it be funded by students? Should it be funded by Government? If the latter, at what cost?
I suspect that the answer lies somewhere between these. I do think a degree is valuable in more than academic / vocational terms, but I do think as a country we may not be in a position to pay for so many people to attend University, and it may be that money needs to be concentrated in certain areas (eg fees covered for people who study medicine then stay in the NHS for 5 years), with everyone else paying the full cost. I also think that more opportunities should be made available by employers for young people to start their careers without having a degree.

Capitalism

@AllTheChaos
Degrees are much more than a qualification.
If you were going to limit degrees to only those that lead into a related line of employment then the bulk of arts, languages, humanities and pure science would be gone.
My work is utterly unrelated to my degree.

My years at University were about making friends and connections and learning resilience and deciding who or what I wanted to be.
The certificate at the end was incidental.

That’s fair @Talkinpeace

If you are happY to pay it works. Or if society is happy to subsidise.

Same here, for my first degree, which I loved! It gave me so much. As a society we need to decide these things though and be clear what we pay for as a group through tax, and what is down to the individual. It feels like a conversation that is needed.

@EmpressoftheMundane
Not sure why you use the word "subsidise"
Higher education is a societal investment.
It need not lead to a vocation.
A well educated well rounded society is a common good.

You can’t expect rates on unsecured loans to be at the same level as those on secured loans, OP. If you default on your mortgage, the bank has the option to sell your house and settle the debt. There’s no asset to sell if student loans aren’t repaid.