£50,000 of Debt at 8x Base Rate – Loan Sharks? No, Student Finance
With pressure on tuition fees seemingly inexorably upward, students are currently leaving university with debts of almost £50,000 and are being hammered by interest rates of 6.3%%.
Previously, interest was applied to student finance loans at a rate equivalent to the rate of inflation, but seven years ago changes to fees on loans mean that students now pay RPI (3.3% for 2017/9) plus 3% – around 8.4 times the Bank of England base rate of 0.75%.
Since 2012 students paid up to £9,000 a year in university fees, treble the previous cost, and a further rise took that to £9,250 p.a. in 2017.
Almost every institution applied the maximum allowable fee which has been capped for the 2019 intake.
Future increases are planned to be based upon the achievement of rigorous ‘gold, silver and bronze’ standards of education, but Liberal Democrat leader Tim Farron said a further rise in fees was ‘unacceptable’ and asked: ‘Where does it end?’
‘Higher education needs to be funded sustainably but for Government to continue to let fees creep up year on year, so students are unable to get a clear picture of the debt they might face, is unacceptable’ said Mr Farron.
With base rates at historically low levels, critics believe the interest charges are exorbitant and are forcing a generation to start adult life ‘on the back foot’; unsurprisingly the Bank of Mum and Dad is being pressed into action as parents have reportedly re-mortgaged their homes or cashed in their pension pots to help their children avoid taking out student loans.
‘forcing a generation to start adult life ‘on the back foot’
Quoted in the Daily Mail, Nathan Long, from Hargreaves Lansdown, said: ‘For many people, if they make the minimum repayments on their student loans, their debts will only get bigger and bigger. Many may never be able to pay them off at all.’
Figures show that the average graduate finishing a three-year course this summer will owe £48,633 which includes £4,980 in interest accrued during their studies; those who take a four-year course will owe £66,659, including £8,455 of interest.
After they leave university, interest is applied to the loan at the rate of inflation as long as the graduate earns less than £21,000 p.a.; beyond this threshold, the charge is inflation plus up to 3% based upon their income.
However, interest continues to be applied to the debt even as the graduate makes repayments, which means that it can be difficult for those on modest incomes to ever reduce their debt; Hargreaves Lansdown estimate that those starting on a not inconsiderable £30,000 salary and achieving good annual pay rises will take 28 years to pay off their loan.
Already faced with the exorbitant cost of accommodation and uncertain pension provision, student debt is a burden that young people will have to shoulder as they embark upon their financial odyssey.
Generation Y, or ‘millennials’ – those reaching adulthood around the turn of the millennium – have already been declared the first generation to be poorer, with lower lifetime earnings, than their parents; those graduating toward the end of its second decade could well continue that downward spiral.
The Government has said that student finance loans remaining outstanding after 30 years will be written off – leaving taxpayers to pick up the bill, although if that were reneged upon, graduates could well carry this debt well into old age.
Even if that were not the case, such graduates would not appear to have experienced a massive benefit to their earning power by virtue of having attended university and faced with such a prospect, those universities deemed to be in the ‘bronze’ category when grading begins, may well struggle to attract students, particularly to courses that deliver little in terms of employability.
Through no fault of their own, students will not have worked sufficiently to establish a credit score in their own right and are therefore obliged to accept whatever terms the student loan scheme dictates.
However, a Department for Education spokesman said: ‘Student loans are different from commercial loans, as they are based on income, not the amount borrowed.
‘Interest is linked to RPI to ensure that student funding remains sustainable. On average, graduates enjoy a considerable wage premium. Our system is fair.’
‘a burden that young people will have shoulder as they embark upon their financial odyssey’
Some parents appear not to agree as Sarah Lord, from Killik & Co, reports many are considering remortgaging their homes and cashing in their pensions to help their children avoid a loan, saying ‘students are starting their careers on the financial back foot. Parents are realising that they are going to have to begin putting money away earlier to help them.’
A survey from online investment platform rPlan suggests that new parents should be saving up to £260 a month to cover the cost of their child attending university in 18 years’ time.
rPlan’s ‘upper-tier’ total cost estimate of £74,307 is based upon fees of 9%, annual living costs of £8,000 and inflation at 2%; it’s ‘lower-tier’ estimate based on fees of £6,000, totals £43,710.05 – £153.27 per month.
rPlan has constructed a range of scenarios based upon shorter time frames and each assumes that an investment return of 3% p.a. can be achieved by its slightly higher risk investment portfolio.
Those attempting to achieve the same sums using an average easy-access ISA would have to put away £311 per month with rates of return of just 1.11% and even the best performing ISA , returning 1.55% would require £299 per month.
Rplan chief investment officer Stuart Dyer said: ‘Parents and grandparents who are prepared to invest at an early stage can typically take more risk. Even with an 18-year time horizon, however, parents may not feel comfortable with a high-risk approach to investing for their children’s education.
‘Saving monthly helps to diversify risk over time – it also allows investors to take advantage of downturns in the market by providing the opportunity to buy investments at cheaper valuations over the long term, which is also known as pound-cost averaging.’
Resources such as rPlan’s University Plan facility may reward prudent parents some way down the line, but that will come as little comfort to those facing hikes in fees and what can only be viewed as punitive interest rates applied to their loans.
In 2010 50,000 students vented their fury in Central London after Nick Clegg went back on his pre-election promise and supported the increase in the cap on tuition fees from £3,290 to £9,000; whilst never a justification for violence, it should not come as a surprise if those facing real financial hardship and struggling to achieve the DoE’s ‘wage premium’ do not take kindly to the prospect of taking their student debt into their later life, racking up interest all the way.
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