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Think tank garbage

January 23, 2017

How mandatory repayments on new student loans are calculated isn’t news. 9 per cent of your gross annual earnings over £21 000 is demanded as a contribution to your graduate debt.

If you earn £41 000 at present (on post-2012 loans) you will face monthly payments of £150 amounting to £1800 per year. (£41 000 minus £21 000 is £20 000, and 9% of £20 000 is £1800).

I tell people to bear that in mind when think tanks and financial companies are scaring students and graduates with tales of total repayments clocking in at around £100,000 over a lifetime (the 30 to 35 years that they are in effect).

What sort of sums would you have to be earning today to make the average annual contibution needed to hit those levels of repayment? That’s a useful question to keep in mind when reading news coverage of loans; having a toy model of this kind in your head helps avoid basic misunderstandings.

Unfortunately, Intergenerational Foundation thinks you can base an analysis of English student loan policy on such simplified calculations.

Even worse, journalists have fallen for it. The BBC runs with the headline that someone earning £41 000 would repay £54 000. That’s taking the £1800 above and multiplying by 30 to cover the 30 years of repayments.

The problems with such an approach should be obvious. It assumes that the individual has exactly the same salary and faces the same repayment threshold for 30 years, but is prevented from clearing their debt because of interest accruing. (The addition of interest to a toy model will distort the analysis from the off without the addition of other real-world features such as earnings growth. Here, a measure of inflation has been used to determine interest, but plays no part in earnings or other features.)

IF attempts one realistic salary pathway calculation. Here a graduate ‘earns £22,000 for 3 years, then £25,000 for five years, then £30,000 for five years, £35,000 for ten years and £41,000 for seven years’.  Their graduate ends up making £31 000 in repayments, but this is on the assumption that the repayment threshold is frozen at £21 000 throughout, but with RPI running at 2.8% for thirty years for the purposes of calculating interest.

There are two key points to make in relation to those results:

  • The value of that final £41 000 salary would be the equivalent of around £16 000 today if the RPI used is a guide. But IF nowhere discusses how the value of money changes, leading the reader to the mistaken thought that the value of total cash repayments (£31 000) is similar to the amount loaned (£28 000 of tuition fee loans) despite that first sum and the repayments being years apart.
  • The repayments would not have been altered by the addition of maintenance loan debt. Here IF removes a ‘generous’ feature from the government-backed scheme in an effort to present it as worse than it is. I can’t see any legitimate reason for only discussing tuition fee loans and indeed alternative loan companies use the same trick to make their loans seem like a better deal than those from the SLC.

So the IF modelling is very ropey and their findings aren’t really open to sensible interpretation. The problems though run deeper. From a public policy angle, the BBC focused on claims that the taxpayer will have to pick up the tab for write-offs.

“At present the taxpayer picks up the tab for unpaid loans after 30 years, allowing graduates to walk away from tens of thousands of pounds of debt and interest charges.”
But the cost to government is not – as IF assumes – the sum of nominal loan balances written off after 30 years. It’s the difference between initial loan outlay and the value of repayments received (and that means introducing the time value of money).The government currently issues loans thinking it will only get back the equivalent of 75p for every £1 that goes out the door. (IF cites the old 45% figures not realising how much has changed in the last two years).

I could go on.There are many mistakes in the report. I’ll just point out one more:

Student loans are cancelled 30 years after “eligibility to repay”.This means that loans will have a term exceeding thirty years where eligibility to repay (i.e.reaching 21,000 salary) is delayed.
Completely wrong. “Eligibility to repay” is determined by when the student left the course – not when they cross repayment threshould. For those finishing in the summer, the clock starts in the following April regardless of earnings levels. Someone becomes eligible to repay and then the  mandatory repayment is calculated in relation to the threshold: the life of student loans is not extended by periods when borrowers are earning under the threshold.

(Declaration – I used to be on IF’s advisory board and wrote a report for them on student loans in 2012, but resigned a few years ago).






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