Student Loans - The Truth

I received a statement today in the post from the Students Loan Company showing how much I still owe for the privilege of attending university. Now I wont get into the argument about whether students should be paying for their education as that has been widely reported in the past, instead I will focus on the issue of whether students have been misled.

For those that don’t know about repaying student loans, repayments are made at a rate of 9% of income above 15 grand (basically it’s like another income tax until repaid). Each year the amount owed is adjusted in line with inflation (calculated using RPI, the Retail Price Index). For the period Sept ‘06 - Sept ‘07 the RPI rate used was 2.4% APR, but from Sept ‘07 - Sept ‘08 the rate has doubled to 4.8%!!

If students are graduating with an average debt of £20,000 then that means the amount of interest they are paying has jumped from £480 to £960 per year. In theory this is just reflecting the increasing rate of inflation but this is where the government gets sneaky by having two measures of inflation, the RPI and the CPI.

Students have always been led to believe that in real terms their debt would not get bigger, but this is clearly not the case. Whilst the CPI has remained relatively flat RPI has increased over the last 2 years. Now here is the clever bit, your wages tend to rise in line with the CPI measure yet student debt is adjusted by the RPI measure.

 

    http://www.statistics.gov.uk/cci/nugget.asp?id=19

There is lots of terminology and figures thrown around in this article so lets look at a specific example. Let’s imagine a public sector worker that has recently graduated earning £20,000 per year, with an average student debt of £20,000.

Now they would be making repayments on their loan of £450* per year, so it will only take them 44 years at this rate to repay (although the government kindly writes off the debt when you retire). However the amount of interest they are being charged has increased to £960 per year. But that’s ok because the government is about to increase their pay, but only by less than 2% in line with the CPI measure of inflation, so they will be earning an extra £400. At the end of the financial year their loan statement will read:

Loan balance brought forward £20,000

Interest £960

Repayments £450

Loan balance carried forward £20,510

So even though they have worked a whole year their debt has actually increased. The situation doesn’t get any better if you were to project this into the future, after 5 years the amount owed would be £22,216 yet their pay would only be £22,082. In other words their student loan debt will be around until they retire so they will always be paying 9% tax on any income over £15,000.

I’ll leave you with one final thought, student debt is currently estimated to be running at just over £14.6 billion yet just last year parliament approved the renewal of the Trident Missile system at a cost of £35 billion, just imagine what else that money could have been spent on!

* £20,000 less £15,000 earnings threshold x 9% = £450