Martin Lewis: If it is expected that 83% of them will not repay their student loans, who will pay? It doesn’t work the way you think …
Student loans are a political hot potato and widely misunderstood. I recently explained on a blog why, weirdly enough, lowering tuition fees might hurt most graduates and, with the logic of that, I explained it is predicted that 83% of university leavers under the latest English system will not repay their loans in full within 30 years of their cancellation.
No wonder then that many people have asked me, “If so many people don’t pay back, who does? This is something I discuss in the Q&A section of my 6.1% “Graduates” interest – panic or pay? Guide, but I thought it was worth it to get out of it and give him his own home. So this is it…
Millions are paid back, even if people do not pay back in full
This is a “loan” from the state, so it’s not about who pays the rest of the contribution, it’s more about the failure of the state to be repaid.
However, remember that the 83% figure is the number of people who will not reimburse FULL – many, many less will not reimburse anything at all. Graduates who started since 2012 have already repaid over £ 200million and have only been out of college for a few years at most.
Initially in 2012, the system was put in place with the expectation that less than 50% would not fully repay. They were wrong, and now it is predicted to be much higher. It was expected to be 77% just before the news was announced that from April people would only start paying back when they made more than £ 25,000 instead of the current £ 21,000 (and it will increase with average earnings each year thereafter).
This announcement means that even fewer will reimburse in full, only 17%. Overall, this means it hasn’t been as successful for the public purse as it was supposed to be – the 2012 coalition government got its costs wrong.
Yet this still means that compared to before tuition fees, when the government simply paid universities through a direct grant, billions are now being paid back. Whether that is enough to justify the tuition fees, or whether it has caused inflation problems on university costs, is up to politicians to debate.
Be prepared to have your brain twisted
One final thought on this, even though it can hurt your brain. The problem when we say that “the taxpayer foots the bill” for what is not paid, or “the government makes a loss if student loans are not repaid”, is that the whole concept of what goes wrong. SHOULD be refunded is arbitrary.
For example, one way to increase the number of people repaying in full would be to reduce the interest rate to the rate of inflation (as was the case before 2012). Do this and more people would pay off in full within 30 years, so the “loss” would be reduced. But that would mean that the total amount the state would receive would be lower, so the taxpayer would actually pay a higher bill.
Conversely and perversely, if interest rates were increased, and for ease, let’s be ridiculous and say RPI + 100%, then almost no graduate would fully pay off the loan within 30 years, so the “loss” would be enormous, but the state would bring in much more, leaving the taxpayer in a much better position.
This means that you can’t use the percentage of people who don’t get rid of completely as a decent mechanism to gauge the real cost to the state (although it’s helpful to see how well that matches up to what was expected. ).
What you would really need to do is compare how much the government is recovering against its own costs. This is the amount he paid out (so the loan effectively) plus the interest at his cost of borrowing, which is probably a much lower interest rate than added to student accounts (although I leave it to economists care to provide a rate). Compared to that, many more students are actually reimbursing government costs.
Hope this makes sense, let me know your thoughts below.
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