One of the perverse consequences of the Browne higher education reforms – if the leaks are correct – is that payments may land hardest on graduates who end up with middling incomes.
Why? Because students from the wealthiest families are likely to pay back their loans quite quickly. And that means that they will pay less interest (loans will no longer be interest-free) than their less affluent friends. The point was made by Alex in an article a few weeks ago:
This is because real interest rates will mean middle-income graduates take longer to pay off their loans – meaning they ultimately pay more than those in high-income jobs. “Raising the fee cap isn’t nearly as regressive as the cutting of subsidies it may imply,” said Iain Mulheirn of the Social Market Foundation.
You can actually do the maths yourself. The assumptions used in the Browne review (when it discusses the distributional implications of the proposals) are a tuition fee of £6,250 – meaning a possible overall debt of £30,000 if you assume £3,750 of maintenance loans.
If you assume a real interest rate of 2.2 per cent you can see how the interest stacks up over a long period, say 30 years. I’m presuming (being well-informed) that the starting point for repayment would be £21,000.
Someone on £50,000 a year who repaid over 13 years would see a total repayment of £34,958. By contrast, if you earned £35,000 a year and repaid over 30 years the repayment would be the much higher £37,800. A more extreme example is someone on £100,000 who – if they repaid over four years – would only repay £31,849. That is a significant difference.