CHILDREN AND FINANCIAL PLANNING
Synopsis: The Institute for Fiscal Studies has been looking at the long term consequences of the £9,000 a year tuition fee.
Date posted: Wednesday, April 23, 2014
Shortly before Easter the Institute for Fiscal Studies published a report entitled ‘Payback time? Student debt and loan repayments: what will the 2012 reforms mean for graduates?’ The IFS has updated some earlier number crunching, using a new model of graduate earnings and loan repayments to examine the pattern and size of loan repayments made by different types of graduates.
The IFS’s work does not make very pleasant reading for the Treasury. The report’s main findings are:
• Under the new system introduced in 2012/13, the average student debt on graduation (tuition fees, maintenance loans plus interest) will be more than £44,000 against about £24,750 under the previous system.
• Student debt will hang around longer than under the pre-2012/13 regime because of:
o The greater size of the debt;
o The interest of up to RPI+3% (previously loan interest was RPI only); and
o The higher repayment starting point of £21,000 earnings.
o The write off period is 30 years rather than the previous 25 years.
Compared to the old regime, under which the IFS calculates that nearly half would have repaid their debt in full by the age of 40, only about 5% will achieve that under the 2012/13 system.
• The slow repayment of debt means that the IFS expects 73% of graduates will not earn enough to pay back their loan before reaching the point 30 years from the April after graduation when their debt is written off. The average write-off will be around £30,000.
The IFS gives the example of an ‘average’ teacher who under the old system would have cleared their graduate debt by 40, but in the new system will reach their early 50s with £25,000 of debt that is written off.
The IFS numbers pose an interesting dilemma when it comes to funding for university fees. For the graduate employee with more than £21,000 of earnings (in 2016 terms), the combination of tax, NICs and student loan repayment means a combined marginal rate of 40% (20% + 12% +9%) until they hit real higher rate tax, when the marginal rate rises to 51% (40% +2% +9%). That is not a pleasant prospect, especially as the IFS numbers suggest that it will cover most of the family-raising period. On the other hand, repaying the loan early could mean in about three quarters of cases removing the benefit of the 30 year loan write-off.
Perhaps, rather than funding to meet student loan costs, the idea should be to fund to meet graduate living costs.
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