DIY Investor Magazine
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June 2017
57
well into old age.
Most students will not have established a credit score
in their own right and therefore have to accept whatever
terms the student loan scheme dictates; the way the
interest is structured keeps borrowers paying for as long
as possible.
The Department for Education told Muckler: ‘Student
loans are different from commercial loans, as they are
based on income, not the amount borrowed.
‘Interest is linked to RPI to ensure that student funding
remains sustainable. On average, graduates enjoy a
considerable wage premium. Our system is fair.’
But RPI fluctuations can add significantly to the debt
each year; the more that is earned, the higher the
interest gets:
Take the example of a graduate with a £35,000 of debt,
earning in the region of the national average wage -
£27,000 a year – and achieving a top-end annual salary
increase of 3.5%. With RPI at 0.9% - as it was at the
inception of the scheme – the debt would be cleared
in 25 years, with £56,000 repaid, of which £21,000 is
interest. With RPI at 3.1%, it would just about be clear by
the 30-year cut-off, with £82,000 repaid.
With a salary of £30,000, the debt is cleared after 23
years at 0.9% with £55,000 repaid, but 3.1% adds seven
years to the duration and £37,000 to the amount repaid.
These illustrations assume RPI remains constant for the
duration of the loan, when in reality the rate will fluctuate,
but clearly student debt is a burden to be carried by
low, middle and high earners alike and a significant drag
on those looking to purchase a property, or put together
a life.
This may have slipped through largely unnoticed when
RPI was at historic lows and focus was on tuition fees;
however, RPI was 5% as recently as March 2011 and
one of the predicted consequences of Brexit is a rise in
the cost of living.
Student loans may be no less transparent than
a variable rate loan or mortgage, but Muckler is
concerned at the number of students that may have
signed up without being aware that wildly fluctuating
interest rates could add years and thousands of pounds
to their repayments.
For context, Yorkshire Building Society has just
launched the UK’s cheapest ever mortgage at just
0.89%; that may come as no comfort to those that are
never able to shuck off the crippling burden of student
debt and for whom home ownership will remain just a
pipe-dream.
Future increases to tuition fees are to be based upon
‘gold, silver and bronze’ standards of education; Liberal
Democrat leader Tim Farron said further rises in fees
was ‘unacceptable’ and that students are unable to get
a clear picture of the debt they might face.
Having retrospectively increased student loan payments
and withdrawn maintenance grants, trust in the
Government is not high and Mr Farron’s party may be
considered to have worsened many a poor student’s
plight.
The decision to take on such significant debt is not
an easy one and universities deemed to be in the
‘bronze’ category, may well struggle to attract students,
particularly to courses that deliver little in terms of
employability - BA (Hons) Golf Management, with a fifty-
grand monkey on your back, anyone?
This is a topic to which we will return because it feels
intrinsically wrong, and likely to be more so as inflation
becomes more significant; it is certainly time for parents
and grandparents to consider some of the options that
exist in terms of establishing investment plans aimed at
giving children a financial head start.
It’s all a far cry from when Muckler gratefully received
his beer tokens from the local authority and immersed
himself in all of the hedonistic and mind-expanding
experiences that university life could serve up –
achieving a perfectly respectable ‘Desmond’ along the
way.
‘WILDLY FLUCTUATING INTEREST RATES COULD
ADD YEARS AND THOUSANDS OF POUNDS TO THEIR
REPAYMENTS’
