Wednesday, 8 December 2010

Paying Off Student Debt

According to a very short piece by Chris Cook in last weekend's FT an an upper second class degree, as opposed to a lower second or worse adds 8% to men's, and 6% to women's pay. He says,

"Research by the Centre for Market and Public Organisation at the University of Bristol found that Law, Economics and Management were the most valuable subjects for study. The returns on Science, Technology, Engineering and Maths were lower, and on Humanities lower still."

According to Government Statistics the average wage stands at £25,000 p.a., so that means that for men the average, annual value of an upper second would be £2,000, and for a woman £1,500. In fact women would do worse than these average figures because the average annual wage for a woman is less than the average £25,000 figure. Of course, the average hides other discrepancies. If Law etc. came out as the most valuable subjects to study then the return on these would be higher than the 8% and 6% figures, meaning that the advantage from the Science and Humanities degrees would be less than those average amounts.

But, even working on these average figures some intersting facts emerge in relation to the current discussions over Student Fees, and how to pay for Higher Education. The first thing to say, of course, is that the Liberal-Tories have made great play about the fact that by not requiring anyone to pay start paying back the debt until they are earning more than £21,000 p.a. they are not asking students to pay for the fees up front. What they don't point out is that this £21,000 figure is £4,000 p.a. or 16% less than their own figure for even the average wage! In fact, if someone were only earning that lower figure then the actual benfit they would have obtained from their degree would be reduced to just £1,600 for a man, and £1,200 for a woman!! And, of course, its not as though the debt is standing still during any period of time you might be unfortunate enough to be earning even less than that. The interest will be accumulating in compound fashion, and anyone who has seen the effect of compound interest on debts, knows how quickly that sooon doubles and trebles an original debt, or more. Given that the Liberal-Tories are also proposing to sell off many assets such as the Student Loan Book, and are proposing to allow private firms to charge more than the current rates linked to inflation - in fact interest rates of up to 8% have been mooted - its quite clear that just paying back this debt alone could end up wiping out any financial benefit anyone obtained from their degree on average.

But, in reality, its worse than that. If we just take the student fees for a man doing a three year course, then these could amount to £27,000. Even assuming that this debt was not increased by any accumulated interest prior to him beginning to earn the £21,000, then with an average gain of £2,000 it would take 13.5 years for him to pay off that debt, and begin to obtain an actual financial gain from his degree. In reality it would be much longer than that, because interest would be accruing in that figure, and the accumulated debt would also mean that he would be unlikely to have been able to accumulate savings in those early years. The consequence of that would be that where savings might have meant being able to buy a car and other items for cash, he will now have to incur further debt to buy these items, many of which would be necessary in order to obtain the kind of higher paid employment required to make the most of his degree. As a consequence he will also incur interest payments on this further debt, which otherwise would not have necessarily arisen. The same is true, as Charlie McMenamin pointed out a while ago in relation to Ability To Buy Houses. Unless, there is a house price crash, which some analysts are now saying is a necessary component of clearing UK debt, then it is difficult to see how anyone who has been to University will be in any kind of financial position to buy a house with the amount of debt they would already have hanging around them by the time they get to that stage. Certainly no responsible lender would be lending them money under those conditions.

But, in reality things are even worse than that. This debt and the costs of it only relate to that incurred from paying back the fees. If we ignore the other costs run up during that time, because most of them would have been incurred anyway - it doesn't matter whether you buy your lager as a student or as a brickies labourer - then we still have to account for the loss of earnings during the period of study. If we take the Government's figure for the average annual wage of £25,000, then that means during a three year course, in addition to running up a debt of £27,000 for fees, they will also have lost £75,000 in potential earnings during that period. So we now have a total figure before interest of £102,000 that a student has to recover from their higher than average earnings. For a Man with that £2,000 higher earnings that means discounting accumulated interest, discounting the interest on other debt incurred because of the financial position they are in due to this initial debt and lack of savings, it would take 51 years to recover the cost of their degree!!! So if you are intending to do a degree, and don't have some means of paying your tuition fees, and no employment during that period, don't worry about the State raising the retirement age to 67, because you will in any case have to work until you are well into your 70's just to repay the cost of undertaking your study.

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