Prompt repayment is to be welcomed
Last week a plan to impose penalties on students who pay back university loans early was scrapped by the government. In retort, institutions such as the University and College Union replied that this was just another policy designed to make life easier for the wealthy. However, such judgements are far too quick to condemn a policy which never benefited any part of society.
It is true that for graduates on extremely high salaries, a quick settlement would mean avoiding the interest charges accumulated over the 30 year repayment period. However with the current state of our economy, injections of cash from early repayments will actually contribute to the release of public resources, meaning that more students are able to go on to Higher Education; something particularly vital given the whopping increase in tuition fees starting in September.
Such criticisms also fail to take into account the importance of salary. Let’s say after leaving university, your parents offer to pay off your tuition fees. Be it through divine intervention, a lottery win or the death of your dotty dowager aunt, that £9,000 debt has been wiped clean from your slate. For the next 30 years your job as a low paid artist or part-time social worker for example, doesn’t quite earn you £21,000 – the threshold at which graduates must start repaying student loans. Your parents have then forked out a fortune without needing to repay a penny.
So how can it then be said that abolishing a penalty on early repayments would benefit the richest in society, when early settlements give the state thousands more?
I understand that this is an extreme example. But a student that earns a decent, above-threshold, income of £25,000 whose debts amount to £43,500 for tuition fee and maintenance loan would, over the 30 year period, only be expected to repay a maximum of £25,000 before the rest of their debts were wiped (check out the numbers for yourself on www.studentfinancecalc.com). So if they were to settle up their debt in one lump sum they would be paying an extra, hold your breath, £18,500. Penalising this student after the extra cash they have needlessly stuffed back into the treasury piggy bank is not only unfair, it’s ludicrous.
Furthermore, would those who criticise the wealthy for a quick repayment really turn this opportunity down themselves? Parents who seek to pay off their children’s debts as fast as possible cannot be condemned for wanting to do so. Education is all about social mobility, and not everyone who begins on a hefty pay packet will have come from an affluent background. There should not be a penalty for post-university success. If people want to get out the red ahead of the rest they should be able to do so without a threat of yet more debt.
3 responses below. Comments are open.
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Typical Nouse editorial: The richest in our society should pay the least for their education. Disgusting. Before you start throwing around terms like ‘social mobility’ perhaps you should consider the implications of penalising those who aren’t fortunate enough to walk into a graduate job that allows them to pay off £30000 of debt in a lump sum.
@Ben
You have completely missed the point of what is a refreshingly common-sense article. At no point does it say that the richest in society should pay the least for their education. In fact, it points out that those who are both rich enough and choose to pay off debt early will pay far more than the average graduate on a lower income.
Despite the loss of interest accrual over 25 years, up-front payment will still tend to be worth more in real terms than gradual repayment over 25 years, even if the graduate in question is earning an above-average income for that period.
As the article shows, the policy is plain silly because the government should encourage rather than discourage up-front payment after graduation from those rich enough to afford it, in order to maximise total income from tuition fees.
The policy simply does not apply to those from less affluent backgrounds for whom immediate repayment is not an option, but furthermore those who do not repay immediately will in fact be better off in terms of how much they end up paying back!
You have waded in with a lot of gusto with your comment, but it seems you are out of your depth as you plainly do not understand the issue at hand. There is no penalisation for staggered repayment, and neither should there be for immediate repayment. You seem to think the less affluent will be saddled with debt for longer and thus will be worse off, but they pay less in total than the immediate repayer.
I suggest you read this site which is extremely informative and also balanced: http://www.moneysavingexpert.com/students/
Finally, I agree with your implicit sentiment that there should be more equality in society, but your accusation of nouse as typically supporting the rich over the poor is rather strange and misguided. If anything, the paper leans to the left, as you will learn if you read a few editorials from previous issues.
Yes the government would earn more if those rich parents of whom have £36k lying around were also financially stupid or do not have an accountant (both of which seem unlikely because richer people are unsurprisingly more canny with maintaining their wealth). These people are NOT going to pay off their loans early for exactly the reasons you highlighted above. All that’s going to happen is the exceedingly wealthy will be able to skip out of the inflation + 3% interest rates above £41k. People who come from humbler backgrounds and although earning a large amount will probably not be able to pay of their loan quickly leading to a disparity between those who are exceedingly rich and those who are quite well off through hard work. This move is not a push for social mobility and in fact means those who beat the odds have to pay more, subsidising these early repayments. This is why a graduate tax was a far better idea.
“Finally, I agree with your implicit sentiment that there should be more equality in society, but your accusation of nouse as typically supporting the rich over the poor is rather strange and misguided. If anything, the paper leans to the left, as you will learn if you read a few editorials from previous issues.”
Having read the piece on the NHS I would have to disagree.