Thursday, 17 April 2014

Student loan repayments will affect many more than realise



Student Loans company include a means to work out repayments, but it has to be realised is based on current interest rates and incomes:
Student Finance calculator



Figures obtained from the calculator are not guaranteed to stay as they are, as it is just a guide that is set at current rates. Also rates are liable to fluctuate over the 30 years of the loan and may well rise significantly as current inflation technically according to the current means of calculation from a basket of measures is at a near historic low, as are wage increases, which for many transpire into effective wage reductions. But in decades to come inflation is therefore likely to rise for many reasons, not just a failing economy, which is also a possibility even with hyper-inflation, but inflation can also occur in better economies too, so basically it means the current interest rates are likely to be close to the minimum and could rise much higher over the next 30 years. 

Student loan interest payments are linked to the retail price index (RPI) inflation. Also as all students will have a large loan and assessed by banks for mortgages and further loan conditions, not by the amount taken out, but rather the amount to repaid and remains as a debt if not repaid within the length of time the loan stands. So if a mortgage is required by a graduate within 30 years of leaving university, it may affect that as a pre-existing loan. If a graduate gets married to another graduate, they will both possibly have loans, unless one is wealthier than the other, but assuming both graduates are not wealthy then the total loan amount combined will be up to double.

Unless a single graduate or two graduates together as partners are wealthy enough to pay off their entire loans based on course tuition fees and maintenance loans this debt will remain until their mid-fifties if carried on from school and college to university or older if a mature student. A maintenance loan is generally required along with a tuition fees loan for most students. It is therefore combined and is likely to be at the highest levels for less well-off students, as even doing part time work whilst at university is often totally insufficient to cover maintenance, plus the extras of being a student, which may include travel and taking advantage of a social life whilst at university. So rather, student jobs pay for the extras, but a maintenance loan is still required to cover the essentials.

Also the sell-off of the student loan book adds another complication as it means whatever finance companies take over the loan can impose their own further conditions and even adjust interest charges and profit margins, so these too could rise far above current rates.



Student loans interest rates are set at a premium and are linked to the Retail price Index (RPI):

Altogether for a 3 year course it is likely to add up to close to £45,000, but as soon as the money is borrowed its repayment is based on the conditions of the loan, with interest rates especially from new students starting for 2012 onwards, being at a high rate and over 30 years, so actual repayment is not the £45,000 borrowed but is a multiple of £45,000. At current rates, with interest added over a 30 year loan period, the amount to be repaid can be as much as £160,000, but if rates increase this figure would also be even higher in tandem with any increase in rates, plus potentially added charges from a privatised loan book and is likely to be much more. Repayment costs are noticeably higher for those unable to repay the loan sooner, with ironically very highly paid graduates that often have connections to gain the highest paid jobs, a world away from burger flippers or Pound expander stores, having the lowest repayment costs.




Note on RPI inflation:

Even though actual inflation is different from official government RPI, it all depends on what is included in the index. 

Retail Price Index, how it's calculated 


For the poorest it’s much higher than more well-off due to contents of the basket, just as average wages are skewed by massive increases of better paid jobs negating actual losses of lower paid jobs. Utility bills for instance make up a much higher percentage of cost of living for poorer people.

However, no matter how much governments like to massage figures, which they can sometimes do for extended periods like the recent figures demonstrate, usually there comes a time when even the basket they use is also affected. They can of course keep changing the contents of the basket to make it seem lower, but eventually real world finance discovers the fake accounting and reacts and can do so very rapidly, just as it did in the Weimar Republic.


All told the indication is historically and technically that RPI should rise and could do so significantly over a 30 year loan period and as student loans are linked to RPI plus a premium, plus if the loan book is sold private, additional profit margins, so it’s likely that actual repayments will be far higher than any figures from loan repayment calculators based on current rates indicate.

 
Map showing comparison of cost per year for degree studies in different European countries, featured in later blog:
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