A couple of months ago the Government announced a rise in tuition fees paid by students to attend British Universities. I’m not interested in the politics but I’d like to put some numbers to the changes and see whether the move will actually leave students worse off over the life of their student loan. Monetarily the two main changes from the current system were
a) Universities can charge tuition fees up to a total of £9,000 per annum (up from £3,375 that will be charged for the 2011-12 academic year)
b) Students will repay their loan at a rate of 9% on any income above a threshold of £21,000 (as opposed to the current threshold of £15,000)
I’m looking to calculate the effect that these changes will have on the amount that students pay over the life of their student loans. To prevent this post from becoming more boring than necessary I’ve outlined the assumptions I’ve made at the end of the post.
I’ve looked at the numbers for the three different paths taken by most University students (three year Batchelor’s degree, four year Masters and Masters followed by a PhD). I’ve also factored in a couple of variables; the graduates starting salary and the rate at which their salary increases.
The average graduate starting salary is ~£25,000 and so I’ve looked at starting salaries that range from £17,500 – £32,500. The values for salary inflation range from 2 – 6% per annum. This covers a range of incomes that are below inflation (2 &3%), at inflation (4%) and above inflation (5 & 6%).
Each of the tables below show the difference (in 2012 £’s) in the amount that graduates will pay over the life of their loan under the new system as opposed to the current system for each combination of these variables.
Basically if a cell is green then the student will pay less under the new system and vice versa. I’ve rounded the results to the nearest £1000 as the model I’m using is pretty crude. Down the left of each table is the graduates starting salary and across the top is the rate of salary inflation.
First the most popular degree choice; Batchelor’s students:
Then for Master’s students:
And finally for Master’s students who go on to study a PhD:
First impressions are that the three tables mirror one another very nicely and there isn’t a lot of green there. The new system appears to benefit students who have a low starting salary and receive below inflation wage increases. I don’t think many graduates will find that a particularly pleasing proposal.
Those most affected are those who earn an average salary and receive pay rises at or above the level of inflation. It should come as no surprise that this group will account for the largest number of any students. It seems like the Government knew what they were doing…
In conclusion I can guarantee that 40 years in the future we’ll hear the Government of the time complaining about writing off huge swathes of student loans the reality is that they will have received vastly more under the new student loan system than the one that is currently in place.
Regardless of what the Government promise student loans are guaranteed to rise in the future, it’s too easy to sell. Spin an aging population a line about it being a choice between increasing taxes/cutting pensions (which affect the vast majority of the electorate) or raising student loans (which affects a tiny proportion, many of whom are too young to vote) and there’ll only ever be one winner.
I’ll round off by mentioning a two points. Firstly the most that I’ve being paid back in these scenario’s is ≈£40,000 in real terms (ie the value of the £ in 2012) and that is for someone earning (in real terms) ≈£45,000 thirty years after starting their job. And secondly the difference between doing a PhD or not make very little difference (less than £1000 using this model) as to how much money you will pay in total and this is true for both the current and new systems.
*The assumptions made for this post are as follows:
1) The interest rate for student loans is determined using the Retail Prices Index (RPI), which over the past 20 years has averaged 3.86%. I’m assuming that it continues at this pace for the foreseeable future. I’m also assuming that tuition fees and student loans will increase at this rate for each year of study.
2) The student comes from an affluent background and studies outside of London (Where higher maintenance loans are available). Basically this means that the student receives the available maintenance loan but none of the ‘means tested’ portion.
3) An employee’s salary will rise at a fixed percentage each year. This isn’t a perfect model (salaries tend to increase at a faster rate at the beginning of a career than the end) but is a pretty good starting place.
4) Loans are written off 40 years after graduation.