Reflections on student loan

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At the end of last month, I paid off my student loan. Sort of. I haven’t actually sent the money or anything practical like that, but the amount I have accrued in student loan tax is now enough to cover the remaining balance. So once I get my tax bill, it will be sorted. Just in time for me to start paying George Osborne’s increased tax on small business owners.

This gave me a moment for reflection. I am 29 years old. I graduated at 21, so eight years seems pretty good going. Most people, however, will not have the opportunity to repay their loan anywhere near as fast as me.

First, my loan was quite small. When I went to university, tuition fees were £1,000 a year. Most of my loan was made up of maintenance loan, the money they lend you to live on. This was about £3,500 in my day but is probably more now. The year after I started at university the fees went up to £3,000. More recently, they have risen to £9,000. Living costs are probably rising too, so let’s say you need £5,000 a year maintenance loan now.

In total that makes for £16,000 a year. Assuming you get your degree in three years (not everyone does), that means you will have built up £48,000 of debt by the time you leave university: almost four times the amount that I left with.

Second, I am a software consultant, which is a well-paid industry. Many people will never earn the amount of money I earn. If you are a teacher, for example, only senior management will have pay higher than a software engineer who is a senior but still very much in the trenches of everyday code writing.

According to the Official of National Statistics, as reported by the BBC, the average earnings for people with a degree are £29,900 per year. This compares with £17,800 for people without a degree.

Let’s say you are earning £29,900 as a graduate. £17,335 if that is below the threshold. That leaves you £12,565 that is taxable for student loan. This is taxed at 9%, so that means you would be paying back £1,130 per year. With a loan of £48,000, that means you will be paying back the loan for 42 years.

That figure is far lower than it would be in real life, however, because it does not factor in the interest on your loan. That will add a large amount on to your debt, especially as £29,900 is the average earning over your career, not what you will be earning at the start. Initially, you will be lucky just to pay the interest off.

This is irrelevant however as your loan is cancelled after 30 years.

What this means in practice is that if you go the university now, you can expect never to pay off your student loan. What you can expect to pay is an additional 3-4% tax for the 30 years after you start your first graduate job.

Is student loan a good idea?

I have written before about the difficultly of arguing against tuition fees, though there are some points that seem to hold up.

However, with the new system, the sheer nonsense of it all seems to work against the tuition fee system. We have a series of ‘loans’ that we never expect to be paid back. We’re not saving the entire cost of tuition because most people are never going pay it all back.

We are saving some money, of course, an additional 3-4% tax on graduates for most of their working lives is a considerable amount of money. However, given we could just tax everyone more, and then provide everyone with a free at the point of access education, without having to subject people to the choice of lumbering themselves voluntarily with the additional tax, you can make a good case for abolishing tuition fees.

Going to university is still worth it

Even with the current system in place, the best choice is still clear. As graduated out-earn non-graduates by an average of £12,100 per year, even with the additional tax of £1,130, you are still almost £11,000 better off with a degree.

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This entry was posted on Saturday, April 9th, 2016 at 10:25 am and is filed under Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.