Budget 2015: Students

Budget 2015 – Students

I’m going to attempt to be non-political by explaining how the current student loan system works. This relates to “Type 2” loans, which started in September 2012. Having watched mainstream media coverage of the Budget, I was alarmed at the degree to which little was known about the cost of a prospective Degree… by both media pundits and potential students.

Your Starter for Ten

Being a student involves many things, but financially these are the basics – the cost of the course, the cost of the accommodation and the cost of living. Over the last 30 years the number of students has increased enormously, fuelled by the belief that higher qualifications result in better choices, better income, better national prosperity. As you will know Colleges and Polytechnics became Universities some time ago, for no other reason (I think) than appearing less elitist.

Anyhow, the cost of a University course varies relatively little, most are £9,000. Those not living at home, need accommodation, which realistically costs between £3,500 – £6,000 a year, depending on location and type. Once through the first year most are left to house share within the private sector. Then there is the cost of living… food, drink, books (depending on the course) and the occasional fun night out. I think its possible for most students to live on £80 a week for this.

Loans and Grants

That’s it. Those are the costs. You can pay yourself or you can apply for a tuition loan to cover the cost of the course and a living maintenance “grant” (also a loan) for the living part. Those from families with low incomes can also apply for a further grant, some of which can be a loan, some is a grant, never to be repaid. The Chancellor announced on 8th July that this bit is changing – so that its all wrapped up as a loan. Nothing gratis.

 

 

Student Debt

The debt clock starts once the 3 year course ends. Interest is added and so the debt increases, but the amount of interest added depends on income (RPI for those earning less than £21,000 and RPI up to 3% for those earning £21,000-£41,000, above that its RPI+3%).

Repayments are made via salary if you are employed, or via self-assessment returns if self-employed. No payments are made if income drops below £21,000. Leaving the UK means that the loan is repaid directly to the Student Loan Company… failing to notify them will result in penalties. The loan lasts for 30 years and then cancelled, whatever the balance.

So let’s suppose you have three years of tuition loans (£18,000) and 3 years of maintenance loans (say £15,000), a total debt of £33,000. In theory if you never work or earn more than £21,000 you will not repay a penny. Hopefully University was inspiring enough and helped to obtain a career in something that is rather better paid than £21,000 a year over time… so most will pay something.

The Repayments

This is where it seems that most of the misunderstanding occurs. Loans, however large are only payable if income is over £21,000. If income falls below this, payments stop, interest continues to accrue. In essence then the mechanics of this are more like an extra tax than a loan.

Gross Income Annual Payment Monthly Payment
£21,000 £0 £0
£22,000 £90 £7
£25,000 £360 £30
£35,000 £1260 £105

 

Perhaps you could think of a mobile phone contract… £30 a month seems pretty “normal” for a phone. So I fail to see how £30 a month is not affordable for a Degree. Of course many graduates would hope and expect to earn much more than £35,000. As they do so, their repayments rise. In fact repayments are calculated at 9% of pre-tax income over £21,000. So a graduate earning £150,000 would pay £11,610 a year or £967 a month (the monthly payments are always rounded down). Of course by that point one would expect the loan to have been repaid anyway.

The Politics

Frankly I would need to be persuaded (and open to being so) that going to University isn’t affordable under the current terms. However this misses the wider and more substantive political point. Do we want a well-educated society that one day will be “running the country”. Do we view higher education costs as an investment in our own population or not? The argument that better educated people get better paid jobs and therefore pay more income tax applies whichever side of the debate you stand.

It would appear that given the increase in courses and students, most believe that a Degree must provide better choices. In 1920 only 4,357 first Degrees (as in a Degree not a Masters) were awarded, by 1950 the number had increased to 17,337 and by 1970 51,189. 1990 saw 77,163 Degrees awarded and in 2000 this rose to 243,246. In 2011 the number stood at 350,800. This level of growth is pretty dramatic isn’t it. Since 1980 the number of graduates each year has increased five-fold or eighty-fold since 1920. [source: House of Commons Library, SN/SG/4252 27 November 2012]

Naturally a “free” University system is open to abuse, (every system is) the current one is too – its possible that a graduate could avoid repaying the loan by keeping income below £21,000 a year for 30 years… but I imagine that would be rather difficult, when allowing for real life and inflation.

Happy to be challenged, but let’s ensure the facts are right. The notion of starting adult life with a large debt isn’t pleasant, but in practice it isn’t a bad solution to help more people improve their education.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Budget 2015: Students2025-01-28T14:35:51+00:00

Straining Gnats Test

There are times when I feel quite despairing. The regulator has had an initial go at reviewing the effectiveness of RDR, the new world that was meant to result in better advice, greater clarity and fewer problems. It would be fair to say that there is a wide range of views on the wisdom and merit of RDR as is has been “delivered”. My own opinions aside, the regulator is concerned that investors (that’s you) do not understand percentages. Now call me whatever you like, but if an investor does not understand basic maths, then they really have no place investing their hard earned money. I’m not talking about complex percentages, such as how to put in plain English the interest charged by payday loan companies that the new Archbishop of Canterbury is attempting to address, nothing as complex as that. I’m talking about working out what 1% is. Yes calculating what 1% (one per cent) is.  The regulator does not believe that investors can do this simple sum of moving decimal points two to the left. One per cent of £100,000 is £1,000 (just to be clear).

Now, if things are really as bad as this, then surely the entire education and financial system has failed miserably. Little wonder that politicians do not understand the difference between deficit and debt or how to spot a rip off and how to work out the budget for their own department, rather making the expenses scandal look more like a haphazard attempt at a maths problem. Surely we are all rather brighter than the regulator seems to be suggesting.

So here’s a test, which is bigger?

  • £2,000
  • 1% of £200,000
  • £20,000
  • £20.00

However, the truth is not that this is really about your ability to do sums, but about the framing of information. In fairness to the regulator, this is actually about fees that advisers charge. Its will cost you £2000 sounds different from saying it will cost you 1% of your £200,000. A cynic might suggest that there is an agenda here, but given that many things in life work on a percentage, income tax, capital gains tax, inheritance tax, annual management charges, dividend tax, bonuses, stamp duty, tips, inflation, gdp, interest rates, loan-to-value, electoral majority, and a gazillion other examples one wonders why this really is made into such a “big deal”. This in the context of an investment world that seems obsessed with stochastic modelling and probability… which are far more complex terms to grapple with, let alone the mathematics of standard deviation and the normal distribution curve. I wonder what percentage will be used to assess whether RDR has been a good thing, in terms of how many more people seek advice and how many are removed from reliance upon the State….

Dominic Thomas: Solomons IFA

 

Straining Gnats Test2025-02-04T16:00:43+00:00

It Seems That The Buck Stops Here…(when nobody else takes responsibility)

2006: Notes on a Scandal – Richard Eyre
You may recall that on Thursday 15th March 2012 I posted a that I was groaning about my share of a £60m bill from the FSCS.Well today it arrived (gulp!). This is all due to an American derivatives stockbroker firm, MF Global going bust and their clients requiring compensation. This is simply yet another collapse of a firm that yet again has little if anything to do with real or proper financial advisers, yet it is the IFA and Financial Planning community that are picking up the collective bill from the FSCS.
Rommel Pereira, the FSCS Director of Central Services writes “In the past year the volume and value of investment claims coming to the FSCS has exceeded our previous assumptions. The increase has partly been driven by on-going costs for Keydata Investment Services Ltd and Wills & Co. FSCS has made more decisions on Keydata claims than previously predicted with a higher average compensation payment than earlier claims. There have also been two new failures in CF Arch Cru and MF Global…..We appreciate that the interim levy will not be welcome news for firms in the Investment Intermediaries sub-class, but we have a duty to compensate consumers with eligible claims. We sympathise with firms about the unpredictability of compensation costs but funding is required to cover the costs of compensation until the next levy is raises and becomes available in July.”
This comes with an invoice and 30 days to pay from the date of the invoice or face a set of late payment charges and interest blah,blah,blah…(standard notice) and another (the full proper, big bill, arrives in less than 4 months time).
Look, I know we need a decent compensation system so that when firms mess up deliberately, investors are not left simply being ripped off. However, isn’t there a degree of mutual responsibility that is meant to happen? such as the investor reading the material and deciding that based on the information, relationship and so on, that the investment is worth taking a risk with. Similarly the adviser should be doing relevant due diligence on products before recommending them. Auditors (PWC in the case of MF Global) should be checking the truthfulness and accuracy of any product literature and finally the regulator should be checking that the product is well run and managed properly and those that are arranging it/selling it do so with all the proper caveats?
Yet how on earth do I get billed for the messes that the above clearly failed on? where I have done my part of the job and avoided this rubbish like the plague!  This on the day when many of us will also be pondering how the cost of a second class stamp can really be 50p (a 38.8% increase! and 30% increase for a first class stamp at 60p) oh well at least the FSCS enclosed a freepost envelope! I wonder what your thoughts are and if you would care to let me know. I know I am sounding rather like a bleating sheep, but does it seem fair to you?
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It Seems That The Buck Stops Here…(when nobody else takes responsibility)2025-01-21T15:34:16+00:00
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