Select Committee on Education and Skills Minutes of Evidence

Annex 2


  88.  What is the effect on repayments if graduates pay an interest rate equal to the government's cost of borrowing rather than (as currently) the rate of inflation?

  89.  Answer 1:  Monthly repayments. The change has no effect on a graduate's monthly repayments. Since loans are income-contingent, repayments depend only a person's monthly income. Thus the higher interest rate affects the duration of repayments but not the amount of the monthly repayment.

  90.  Answer 2:  Total repayments. On average, it is estimated that students will take 15-20 years to repay their loans (since the system of income-contingent repayments is new, estimates are all that we have). The model referred to in paragraph 37, estimates that at today's prices if a graduate takes 15 years to repay his loan, the extra interest payments on a loan of £12,000 from removing the interest subsidy is about £3,700. The comparable figure if he takes 20 years to repay is £4,700. Thus a plausible estimate of the additional interest repayments of an average student taking 17½ years to repay is £4,250.

  91.  Some comparators. These numbers need to be seen in context.

    —  With even a modest graduate premium (15 per cent) and real wage growth (including career progression) of 5 per cent, a graduate will earn £270,000 more than a non-graduate over a 35-year career. The extra interest payments are a minuscule price for those benefits.

    —  Over 35 years, a non-graduate on average earnings pays about £520,000 in income tax and national insurance contributions; with a graduate premium of 15 per cent, the equivalent figure for a graduate is about £600,000. Thus the additional interest payment is equivalent to a tax increase of about 0.7 per cent.

    —  Over the lifetime of the average loan, a graduate will spend on average £25,000 on alcohol. To spend £25,000 out of after-tax income a person paying basic rate income tax etc, has to earn £37,000. Thus it would be possible to finance the additional interest payments by having one booze-free day per week till the loan has been paid off.

  92.  The figures in the previous two paragraphs are in cash terms. The equivalent figures in present value terms, at a 5 per cent discount rate, are as follows. On a loan of £12,000, the present value of the extra interest payments is £2,880 over 15 years, or £3,350 over 20 years; thus the average student will pay around £3,115 in additional interest payments. Over a 35-year career, the extra earnings of a graduate are £105,000. The present value of the income tax and NICs paid over 35 years by a non-graduate on average earnings is £195,000; for a graduate the comparable figure is £228,000. The present value of expenditure on alcohol over 17½ years by an average graduate is £14,000, requiring pre-tax earnings of nearly £21,000.

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