Debt free aged 73: How £9,000 tuition fees could be with you for life

I have plenty more to write about China, but I couldn’t let this week pass without commenting on the government’s proposal to cap University tuition fees at £9,000 instead of the current £3,290.

I have previously expressed concern that student loans create a damaging cycle of graduate debt, forcing graduates into steady, low-risk jobs. Many graduates are full of entrepreneurial ideas, but the weight of thousands of pounds of debt stifles their ability to take risks by starting their own businesses. It is precisely these kinds of small high-growth companies that the economy requires for long-term growth, as the majority of net new jobs are created by such companies. The existing student loans system has already discouraged one generation from founding innovative start-ups, and the proposed increase tuition fees will make this many times worse.

There is no easy solution to the funding crisis facing Universities. But what struck me this week is just how far the government has got it wrong. I wonder if they have done the sums:

1.) If we take the average graduate starting salary as £25,000 (the figure in c.2009)
2.) Assume a moderate salary upon reaching retirement of £50,000 (in today’s money)
3.) Assume for simplicity that progress between starting and finishing salary is in a straight line

‘Back of the envelope’ method
The average salary over this person’s career is £37,500. They would pay 9% of their earnings above £21,000, which is an average of £1,485 per year. At this rate they would need 18 years to pay off their debt, not including interest, and not accounting for the change in repayments over time.

More detailed calculation
In order to better understand the proposed fee system I have created a simple financial model of the repayments individuals will need to make over time. With the three assumptions above the more accurate ‘time to pay off’ is 27 years, so a 21 year-old graduate would be paying off student debt until they are 48.

If you add a real interest element to the loan, this has a substantial effect on time to pay off, as for several years the repayments do not even cover the interest. Under a 2% real interest scenario, a graduate on a four year course would not be debt free until they are (about) 73...

Note: A correction to the method, though not the message, of this post can be found here