Thursday, January 24, 2008

Student Loans (again)

Finally I have found a moment to respond to some comments here and here and re-written this post to clarify my ranting a bit. Do take a look.

Meanwhile, although I have made the point when referring to Dave's comments below, I would like to clarify that (according to Wikipedia) the Student Loans Company is not a private company. Instead, it "is a non-departmental public body of the United Kingdom government, responsible for the provision of financial support to students attending university."

Of course, by hiding behind the moniker of a "Limited Company" they can do all sorts of wrong and blame 'privatisation' and 'evil capitalists' and the like. This government is really rather good at that, and it's amazing how many apparently intelligent people are so easily fooled.

In this case the wrongdoing stems around the fact that the current rate of interest on a Student Loan is 4.8%. Despite assurances that this was a loan "at the rate of inflation" 4.8% is in fact at least double other figures which I have seen recently purporting to be "the rate of inflation". If public sector workers had their pay capped at this, and not 2.1%, we might have less cause for discontent, threats of strikes, and large scale protests.

Then, as I have said before, because they don't deduct what is paid back until the end of the tax year, I am paying out each month whilst watching my loan continue to rise. I really should do my sums, but I reckon that this makes the actual rate of interest paid very high indeed.

Of course, you have to read the small print to find this out. If you're burdened with a loan, I wonder if reading this makes you as horrified as I was...


Gareth P said...

Again I find myself agreeing with James *shudders*

The student load interest rate is infact in line with RPI (Retail Prices index), currently 4.8 %, which is apparently a good measure of inflation when the government want to take money off you and the CPI (Consumer Price index), currently 2.1, is a better measure when working out how much to increase public sector workers pay by. This particularly affects teachers, who are after all graduates, whose loans have interest rates of 4.8% and pay increases of 2.5% (slightly better than CPI i admit) but are still very much worse off. And thats without considering the point James made earlier about graduates making monthly payments but only having them deducted at the end of the year.

Alasdair said...

When does this government blame 'privatisation and evil capitalists' for the worlds woes? Pinko lefties like me might whinge about those evils, but I don't hear the government doing it very often. It's gone far further in terms of marketising public services than Thatcher ever dared.

I agree, I don't think it's right that payments are only taken off at the end of the tax year. As for the 4.8%, I think they set the figure once each year, around September, and unfortunately inflation (don't ask me which index they link it to) was very high when they took the snapshot this year.

Even at that rate, Student debt is still pretty cheap, and taxpayers are subsidising your loan. I've seen some Tories calling for an end to the subsidy and for commercial interest rates to be charged.

Ro said...

The problem here is that what you are saying isn't true! The issue of the interest rate is a matter for debate, and the reason it's so high at the moment is that they decide what it is once a year, and this year it happened to be at the peak of inflation (whereas the year before it was at a low point (I think), so we were winning there, but losing now). However, whilst they do only recalculate your account once a year, they do the sums including the fact that you paid it off during the year when they calculate the interest you owe (so you *don't* pay interest on the stuff you've already paid back). And since how *much* you pay is linked to how much you earn, the delay doesn't make much difference.

Gareth P said...

I agree that they only calculate the interst once a year which is a cause for concern but they definately use RPI as the measure for that calculation and CPI for economic forecasting. The 2% target GB always talked about when he was resident of number 11 Downing street was CPI. I have no problem with either measure (although RPI is linked to mortgage repayments and CPI isn't) as long as they're consistent and don't choose the mease which suits them best in each individual case. As Alasdair says 4.8% isn't an unreasonable rate of lending but you can't call that inflation for money you're owed and then the 2.1% CPI for money you have to pay out.

JP said...

This is like the MSc room all over again, except that Steve's not here talking about his willy. And Ro's here.

So it's perhaps more like a bizarre dream where things get a bit mixed up.

Anyway, good times...

I think that the point about different inflation indexes is an interesting one. After posting last night I clicked on the Wikipedia link to RPI but was too tired to focus and take it all in, and was going to ask if anyone could tell me why we have that and the CPI. I'm with Gareth here and think that different rates for different things seems a bit unfair in this case.

I hadn't cottoned on to the fact that the interest was only announced once a year, and the snapshot idea does make sense. In some ways it's just a case of "win some, lose some" as Ro says, so it's not so bad, but I do wonder how closely the loan then actually sticks to the advertised "rate of inflation" as one might perceive it.

Finally, I apologise (again) for apparently not getting my facts right. I'm not the only one to have raised an eyebrow at the "pay now, deduct later" idea, so I'm counting on the fact that if the interest is calculated as Ro says it's not been made blindingly obvious somewhere. Otherwise it would be even more embarrassing.

Gareth P said...

The RPI and CPI are just measures of how much certain prices have changed. Effectively how much more does a loaf of bread cost. The thing is RPI and CPI use different things in their calculations. For CPI it really is just food and retail prices with energy bills considered too. RPI however is a little broader in scope including mortgage repayments (excluding the top 4% of earners in their statistical calculation) and transport costs. It isn't a suprise to me that since 2003 the government has used CPI as the "Rate of Inflation" since it ignores the 2 things that have sored in recent years - namely housing and energy costs.

NB: Above is only a very basic description of 2 very complex (and a cynic might say deliberately so!) economic measures. The nuts and bolts is the government aren't being entirely forthcoming with the whole truth when they talk about inflation rates. It isn't a lie to say public sector pay is capped at the "rate of inflation" and it isn't a lie to say student loan interest rates are charged at the rate of inflation. It just ignores the rather glaring fact that there's more than one way to skin a cat as it were. A lie of ommision I guess.

As for the whole "pay now, deduct later thing" it's something of a minefield - Student loan repayments are calculated in the same non cumulative way as National insurance contributions based on monthly or weekly earnings. This is a good way to do it as obviously it may be perfectly possible that a person earns more so can pay more at different points in the year. However, whilst I'm trusting that Ro is right in saying the IR do there sums correctly and we aren;t paying more than we should, the money is still sitting in a bank account somewhere earning interest until the IR claim it. My question is - who gets that interest?

dave said...

I wrote the biggest post ever and stole it.