Hi, I'm Martin and I write software. I also have a hell of a lot of stuff going through my head with thoughts and opinions on many things. Unfortunately, in this whole jumble I often fail to articulate my point of view very well. This blog is an attempt to rectify that by trying to put all my thoughts on various subjects down in one place. If you want to get in touch, email me at email@example.com.
There has been a lot of anger over the Government's decision to increase the cap on university tuition fees to £6000, with £9000 allowed in some circumstances. There is also anger over the increase in interest rates. However, there has been little proper analysis into how this works out financially. After all, these aren't real loans.
So what is the situation for students today? You pay £3290 a year for tuition (this actually increases in line with inflation) and get roughly £3500 or so in maintenance loan (this is a rough guess based on what I got at university). You start paying interest on this loan at a rate defined by the rate of inflation at a certain point in the year. So already it is better than any other sort of loan. But where it is really different is you pay back a percentage of your income over a certain limit, which at the moment is 9% of income over £15,000. And if after 25 years you have any remaining balance, the amount is written off.
So what will change in the future? Well the fees will be around £6000-9000, the interest rate will be tapered, from 0% on incomes below £21,000 to 3% + inflation for incomes above £41,000, the pay back threshold will be raised to £21,000 and the payback limit will be increased to 30 years.
Now at first glance that seems pretty bad. Fees increase by 2-3x, a potentially large increase interest rates and it's 5 years longer before it is written off. But the key thing that is being missed is the £6,000 increase in the pay back threshold and that interest rates are progressive. This is what helps make it a more progressive system than before.
So what does this ultimately mean? Well lets take some (very simple) scenarios. There are two components to each scenario. The first is whether they use the current or future fee system (and whether in the future system they use £6000 or £9000 a year). The second is the starting wage and average raise per year. So lets go over the fee system components:
Fee: £3290 a year
Maintenance Loan: £3500 a year
Pay back threshold: £15,000
Pay back rate: 9%
Pay back period: 25 years
Interest: rate of inflation
Fee: £6000 or £9000 a year
Maintenance Loan: £3500 a year
Pay back threshold: £21,000
Pay back rate: 9%
Pay back period: 30 years
Interest: 0% to 3% + rate of inflation
Two simplifications will be used. Firstly, I won't be increasing the fee in line with inflation each year. Secondly, I'll assume that interest is constant at the target rate of 2% over the payment period. These will also be for 3 year courses. For these fee systems I'll input some starting wage and average yearly raise figures and find out how much the student pays back. I'll use 3 raise figures: 2% (ie inflation), 4% and 6%. I'll also use 4 starting wages: £10k, £15k, £20k and £25k.
I've put the results in the table below. Where someone is better off under the future system I've marked it in green and where they are worse off I've marked it in red. I've also marked with a star where there is nothing left for the government to write off.
So as you can see, in most cases people are worse off. However, there are several cases where people are better off, on the lower end of the income scale. So the Government's claims that this new system is more progressive seem to be vindicated. It is also worth noting that the lowest yearly wage after 30 years of those who are worse off under the system is £45,000.
The idea behind a graduate tax is simple: university for UK based students is completely funded by the Government. After you graduate you then pay a percentage of your income back for a certain number of years. The thing is, that sound strangely familiar. Those who never fully pay back their loans, and who the Government ultimately writes off the remainder for, are basically paying a graduate tax now.
If you look carefully at the table above you will see some peculiar figures. In the old system those who start on £25,000 end up paying more back the slower their wage rises. The issue is that they pay back the amount they owe before the Government writes off the rest. The more you earn the more you pay each year so the less interest you ultimately pay. The way to turn the system into a graduate tax would be fairly simple conceptually. Remove the notion of fees and just have everyone pay back 9% of their income over £21,000 for 30 years. As an example of what this would do, I've applied it to the two extremes of the starting wage below:
Out of the 6 fictitious people there, only 2 end up paying any more money than the £6000 tuition fee system and only 1 more with £9000 fees. Everyone who starts on £10000 pays no more than in the fee based system, as does the person starting on £25k with a 2% yearly rise. The £25k/4% rise person pays ends up paying the amount they would for a £9k a year course. The only major loser is the person who starts on £25k and gets a 6% yearly rise. They end up going from paying £66k to £121k. Of course over the same time period they will have earned £1.98 million pre-tax, so it's not exactly the biggest impact. So ultimately the fee system is a quasi-graduate tax. The main thing that the fee changes do is make people who are poorer after university pay less, those who are richer pay more and have more people paying it almost as a tax.
While the initial headline of "Tuition fees to rise to £9000" seems shocking and has caused students to protest in London, the reality isn't anywhere near as bad. I admit that I was appalled by the idea at first, but on closer analysis it doesn't seem so bad. Ultimately, people who are protesting against the new system aren't protesting for a system that makes it easier for the poor to go to university. The new system will hardly make a difference to that as you still don't pay anything up front. What these people are protesting for, even though they may not know it, is higher taxes for the poor and lower taxes for the rich.