Student Funding – the injustice of the new plan

It’s been some time since I last posted, and even longer since I felt the need to vent my spleen, but this week’s revelations of the new student funding plans have provoked me!

Leaving aside the pre-election promises about not raising tuition fees (I can see the need for changes with the country’s finances in their current state), there are several issues at stake here.

The first is the ruling out of a graduate tax by members of both parties in the Coalition. Yet, when one run’s the figures of this new idea, one can see that in essence, for all but the richest or most highly paid graduates, that is what this proposal amounts to.

Even using the £6,000 value, and adding on £4,000 to cover living costs (a reasonably conservative estimate), the average graduate on a four year course (of which there are many), will have accrued £40,000 in debts.

At a “market interest rate” limited to RPI (notice that even though RPI has been replaced by CPI for most measures, it has been retained here since it is generally higher) + 3%, (say 5% once bank rates return to a more reasonable amount), then this amounts to £2,000 of interest in the first year. The government says it is being more generous by only taking payments once earnings reach over £21k, but this means that even someone earning £41,000 (the upper limit for the interest rate cap), will only be paying back £1,800. This will not even cover the interest, let alone repay the capital, and what graduate earns more than this in their first few years in work? Those earning a more average £25,000 will not even be making a small dent in their loan balance.

Once earning over £41k, the interest rate sets to the RPI + 3% measure, whatever the base-rate, ie about 6-8% based on recent trends. So even on a salary of £60,000 (an annual repayment of £3,510), will only just be paying back more than the interest. Repaying the capital within the 30 year cut-off period will thus be impossible for just about any students.

In fact, using a 6% interest rate, then for each of the thirty years, the graduate would need to earn over £53,000 in order to just repay the capital after the thirty years. Including wage inflation (eg at 2.5%), then a starting salary of £40,500 would be sufficient.

So, therefore, the likelihood is that virtually all graduates will end up paying this 9% of their earnings over £21,000 for the full maximum 30 year period. Which, to me, sounds more like a graduate tax than a repayment of a loan. This is made even more clear, by the implication that there will be sizeable penlties for those who wish to pay off the loans early, which also seems very unfair.

There is another reason why actually a real graduate tax is preferable to this system, especially since this system is a graduate tax in all but name; Being saddled with £40-50k of debt will make it all but impossible for any graduates to ever get a mortgage on a house. Having to pay more tax, however, would not cause this problem.

Finally, the apparent motive for this is to reduce government spending, but this method will not mean that the government actually saves any money – after all, they will still have to pay the money upfront to fund the courses. This scheme only saves the government more money in the long run. Not in the here and now when it is actually needed.

So, students are again bearing the brunt of the excesses of the previous generation, and will do so for a full thirty years in the form of increased effective tax rates, and inability to get a mortgage, while the government doesn’t actually save any upfront spending. Perhaps it’s time that students and parents wrote to their MPs, to Ministers and to the media to express their disatisfaction.

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