SLC loan repayment calculator is being fixed

The SLC have confirmed to me that they took down the loan repayments calculator ‘temporarily’ for ‘maintenance and enhancement’.

In a separate statement to Radio 4’s Moneybox (who will cover the story today at 12 noon) they confirmed that ‘The Repayment Calculator changes will provide a more general reflection of earnings, that will not be based on male only.’

As analysed on here previously, the SLC loan repayment calculator made two serious errors:

• it overestimated male graduate salary pathways leading to early annual salary increases of over 15 per cent each year;
• and assumed all applicants were male.

It also failed to update its information on average earnings, missing that the the figure had dropped from 4.4 per cent to 1.9 per cent recently and that OBR had revised down the long-range projection of that figure to 3.5 per cent. (The graduate salary increments are added on to that general figure).  But this point is secondary since the graduate salary pathways were based on annual percentage increments applied on top of the annual increment due to rises in average earnings.  For more detail see the original post were I outlined the problems.

The end result was that the SLC’s official calculator was overestimating likely loan repayments.

Why is a more significant problem?

Firstly, it leads to misunderstandings of the loan scheme. Secondly, by presenting SLC loans – which are subsidised by government – as more expensive than they are likely to be, the SLC may lead applicants to consider alternative means of financing study. Private loans, which are not subsidised and must make a return for their backers, can only present themselves as a cheaper alternative to SLC loans, if the SLC trades in overestimates.

The repayment threshold in SLC loans protects borrowers with lower earnings – this is why I have long argued that political efforts should centre on protecting such features more than arguments about the level of tuition fees. The recent decision to freeze the repayment threshold will have much more impact on the repayments of lower and middle earners than the decision to abolish maintenance grants. (NB: if you have never seen the figures supporting that case, you should follow the link).

It only remains to say one thing – an awful lot of academic and think tank work (as well as other calculators) has been based on the SLC calculator (which was also hosted on directgov). All these studies and analyses are flawed and didn’t ask basic questions about the likelihood of these very high cash totals that the calculator was generating.

For example, it is not uncommon to see claims that the average borrower will repay £100,000.

Here’s the kind of questions borrowers and analysts should ask when they see such figures. What must I have earned to repay such amounts? (A major flaw of the SLC presentation was it didn’t show applicants the earnings pathway underpinning the repayment estimates)

Roughly:

let’s say £100,000 is repaid over 30 years. That’s £3,333 of repayments per year. To repay £3,333 at present you’d have to be earning over £58,000 (3,333 / 0.09 + 21,000).

Now bear in mind that the £21,000 repayment threshold in these models is increasing by average earnings from 2020, so 4.4% every year for the disgraced SLC model! leading to a threshold over £60,000 itself at the end of the repayment period. To generate an average of £3,333 in repayments over 30 years takes some very big salaries. How likely is that for every borrower or even for the average borrower? (Only if inflation is such that our present reference points are largely meaningless.)

To repeat a basic point, income contingent repayment loans are unfamiliar loans. They do not behave like fixed period loans (or ‘mortgage-style’) loans.

Repayments are contingent on earnings, so you should always ask, ‘what earnings model underpins these figures?’ and ‘what percentage of income is repayable each period?’ – that is invariably more important that the starting debt or interest rate (two aspects of fixed period loans that do not have the same significance here).