I wonder if you ever have dreams that you are sitting your O or A’Levels or your degree finals? These are a very distant memory for most of us, but for those about to embark upon University life the exam nightmare may become rather more prevalent than it is for the majority of the population.

For students starting University in a years time the new fee system will commence. University fees will be generally in the region of £9000 a year, though of course this will depend on the University and the course. In addition, living costs will need to be met – this is a variable amount, but for those living away from home and outside of London the maximum living cost grant is £5,500 which increases to £7,675 for those living in London (but not at home). These can all be converted into the student loan. So on the face of it you can quickly see how a 3 year course in London can quickly cost over £50,000.

However, unlike the current system, the debt is linked to inflation with a further 3% added on top of this. Inflation in the UK is currently around 4.20% – so the debt would rise by 7.20%. Repayments of the loan need to begin after 3 years – irrespective of whether or not the course has concluded. However payments do not need to be made unless earnings are more than £21,000. Many graduates may struggle to find employment initially and whatever the level of earnings, the debt will increase by inflation+3% each year. The loan lasts 30 years.

Once earnings are £21,000 or more, 9% of income over £21,000 is paid to the Student Loan Company to reduce the debt. So if the graduate earns £21,500 the repayment to the £50,000 loan (plus inflation) will be 9% of £500 which is £45 and is paid as £3.75 a month. Alternatively the graduate is earning £28,000 and pays £630 towards the debt (£52.50 a month). In essence the repayments are small and frankly unlikely to reduce the outstanding balance by very much. This is more like a form of taxation akin to National Insurance rather than a traditional loan.

The biggest problem for the graduate is that of inflation as the debt is linked to inflation plus a further 3%. The expectation for many will be that salaries rise quickly due to early career progression as a result of having a degree. So a graduate that progresses to an income of £50,000 will be repaying £2,610 a year or £217.50 a month. This is collected directly from PAYE earnings. But this all takes time and whether deliberate or not, I don’t see much evidence that the debt will actually be cleared over 30 years for most students. Career breaks, redundancy, life throwing a curve ball – all impact the maths. Only those earning significant incomes will actually get close to clearing the loan.

So some of the “facts” that have been presented in the media are somewhat erroneous in practice. Whilst mortgage lenders say that the loan will not count against graduates, should they wish to borrow other funds for a home or car, the reality is that this is a long-term commitment that the graduate must meet, so in effect does reduce the affordability of a loan and the amount that can be borrowed by something like 3.5 times the annualised repayment.

My own calculations with inflation at only 1% (4% to the loan) for the debt and the income increase a graduate earns is that there is no chance of the debt being cleared over 30 years. Indeed the repayments do not cover the original starting amount of the loan and hardly clear a third of the loan.  Higher rates of inflation make the likelihood of debt repayment lower. Incomes may well rise far faster for graduates, but this remains to be seen in practice. So this may be some comfort to students and their parents. However, the impact of  beginning a loan at say 21 and only finally seeing it end at 51 is not a prospect that I would wish on anyone. Any balance at the end of 30 years is written off. So I think that the Government have got their sums wrong (they won’t get much of the debt repaid).

Thoughts? well… this is really a tax. Graduates will have to be careful to ensure that their reporting to HMRC is very accurate every year under self-assessment. The Government seem to have taken the view that the majority of the loans will never be cleared, but they do get a steady stream of additional revenue for 30 years. The real question will be how the graduating generation manage their finances to provide for their futures and provide homes for themselves and their families. At this point in time, these same graduates will be pretty much forced to pay 5% or more towards their pensions and have a harder time building a sufficient deposit for a home and they won’t get their State pension until they are 68. So I wonder if there is something rather naive in the assumption that they will look after us in our old age!

Whatever your view, paying a £50,000+ loan at a rate of £52.50 a month for someone earning £28,000 is about equivalent to a mobile phone contract. To say that the loans have been poorly explained and pitched to UK plc is an understatement. Context is everything.