Student Loans are better than spending your savings. Here’s why.
Yesterday I met a parent who was considering spending her life savings on her daughter’s tuition fees. With a low income and little other capital, this was a loving gesture from a caring parent who couldn’t really afford it. I told her she would be a fool to even consider paying anything and she should encourage her daughter to take the full support on offer from the government. Why?
If you borrow £400 from Wonga at their standard variable rate over 7 years, you would owe more than Britain’s national debt, £1.4 trillion. But borrow £50,000 from the Student Loans Company to pay for a world-class degree (along with some priceless memories) and it will probably cost you less than £20,000, and could be free.
This doesn’t seem to make any sense: we are repeatedly told that the cost of Higher Education is getting more and more expensive for the student, and as we approach another general election this message will become a repeatedly assaulted position in the narrow no-man’s land of centre politics. The truth of it is, going to university has never been cheaper. Students now receive more in living cost support than in any previous year, whilst the recession has kept rents from skyrocketing, and the repayment system is more advantageous to the graduate pocket than ever before. How can that be the case with a government making cuts faster than an origami instructor?
The government don’t want you to think like that, because the truth is, whilst ostensibly they have reduced the taxpayers funding for universities (via HEFCE, the Higher Education Funding Council for England), the system is losing money hand over fist. The student loan book has run at a loss since inception, with taxpayers funding about 33 pence in every pound lent (otherwise put a third of all student loan monies borrowed is never repaid). Current estimates put that nearer 45p in ever pound for the new system but (and here’s the real spin) no one will know the real impact for another 30 years or so. And by then some other government will have thought up a new way to distract you from the truth of it all.
Sadly all that this does is confuse people and make them panic. The parent I met yesterday was deeply concerned about the interest charged on student loans (over 7% at the moment) and couldn’t understand the difference between being charged interest and not having to pay it back. As a quick test of whether the interest rate matters, let’s consider that if a student goes to university now and never earns over £21,000 a year (unlikely but possible) they would never pay a penny and university would have been free. Despite the outrageously high interest they had been ‘charged’. Would they consider paying their son or daughters income tax? This will in all cases be more expensive and so would be better for the parents to pay. But no one ever offers to do that
Why does any of this matter? Because a relatively hard-up parent I met yesterday represents thousands of similar families on the cusp of wasting their money. The attitude, perverse though it may seem, to a student loan should be ‘so what?’ and ‘who cares?’ It won’t show up in a credit rating, doesn’t have a negative impact on future finance (such as a mortgage) and is the best value funding you will ever be offered. ‘What about the broken system and the problems in 30 years’ time?’ you might ask. Don’t bother: that’s for someone else to worry about, and the terms of your student loan won’t change so it’s not a risk.
I left the parent yesterday with the advice that she should save her money, put it in a savings account and use it to pay off any other debts after her daughter graduates – all of which (including Wonga loans) will be far more damaging than any student finance. If she has no debts when she graduates, don’t pay off her loan but buy her a car and gift her a deposit on somewhere to rent, all of which aid geographic mobility, which is key in securing a good graduate job. The same as I would say to any teacher or parent: ignore the fuss about student finance and do the best thing possible for your child. Do that, and a warm fuzzy feeling should coincide with the knowledge you haven’t been hoodwinked by the spin doctors or media hacks, and that you have set your son, daughter or pupils up for the best possible start to their lives.
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