Tuesday, 26 April 2011

Student Loan Calculator (UK)

One of the major expenditure items in my financial plan is sending kids to University. In a previous post, I highlighted how the new UK student loan was more like a student tax. I have now added a spreadsheet that shows how much students will have to repay. It makes for scary reading!

As you probably are already aware, a student in England (slightly different rules apply to the other devolved parts of the UK) can get a government-backed loans to cover annual tuition fees as well as an additional annual maintenance loan to help to pay for general living expenses. Both loans are applied for through the Student Loans Company.
 
The interest on both parts of the loan is charged at either the Retail Price Index (RPI) of the previous March (which was 4.4% in 2010), or at 1% above the highest base rate charged by a nominated group of banks – whichever is the lower. Thanks to the ultra-low Bank of England base rate at 0.5%, the student loan interest rate for current loans is currently 1.5%, however, when this rises the student loan rate will rise to 4.4%. What is more, under a "progressive tapering" system, the interest rate will rise from 0% for incomes of £21,000, to 3% plus inflation (RPI) for incomes above £41,000.

Now, this is still a 'low-ish' rate but the fact remains that the rules on repayment mean that the loan is a bit like a credit card loan on which you can only pay the minimum charge - the debt keeps increasing. Initially, the maximum repayments (which are limited to 9% of income over £21,000) are not likely to cover even interest payments. After 30 years the remaining debt is written off - but by then many students will have paid back two times (or more) the initial loan.



The BBC published an Excel spreadsheet - prepared by a group of accountancy firms - showing (based on certain assumptions on the interest rate, future income, level of debt. etc.) how the debt continues to mount up. Unfortunately the version published did not include the original formulae - but I have reverse-engineered the spreadsheet and added the formulae back in - here (on Google Documents).

The base calculation assumes that all the students borrow a total of £39,000 - £9,000 in fees and £4,000 for maintenance over a three-year course - and go on to earn above the national average. The speed at which the loans will be paid off depends on the earnings of the graduate - earnings are assumed to increase each year.

You can now try out different assumptions yourself and see what difference these make. It looks to me like the more the student earns, the worse it gets! And that's taxing effort and success - given that this is all in addition to progressive Income Tax (and National Insurance), which I thought was the way we as a nation had agreed was the main way to redistribute income.

It's not fair and it needs to change!



I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

3 comments:

  1. This loan calculator is great for calculating what you will pay in the years after you graduate.

    ReplyDelete
  2. What are your thoughts on people who have gone through either a short sale or a foreclosure opting for seller financing and or rent to own as alternatives to bank loans?

    ReplyDelete
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