Thursday, 16 December 2010

Tuition Fees (stats)

This is intended as a supplement to the below article on the changes to the tuition fees system to highlight in a more straightforward way what the changes actually mean for you.


1) living costs will be £6,000 for a student per year
2) CPI will be 2%, wage inflation will be 3%, RPI will be 4% (interest rate on the loan)
3) This is for a graduate taking a 3-year course
4) Every course will charge the maximum £9,000 a year.

ALL of the changes

1) Tuition fees will now be between £6,000 and £9,000 a year. Up from £3,000 a year previously.
2) The threshold for repayments is now £21,000. £6,000 more than it was previously.
3) The threshold will rise with inflation, before it did not.
4) The highest earners will now pay an extra [up to] 3% interest on their debts.
5) ALL debts are written off after 30 years, 5 years more than previously.
6) There will be fee waivers of up to £18,000 for the poorest graduates but this will not be included in the calculations here to avoid complication.
7) (as yet uncomfirmed) you will not be able to pay your fees upfront, you will have to take out a loan and there will be penalties for early repayment.

As you can see, a fair bit more than what you would realise if you only read what the newspapers told you.

The old system

How it works

Under the old system: You would graduate with about £27,000 of debt. You would pay 4% (RPI) interest on that debt. After 25 years any debt left would be written off. You would pay 9% of your income above £15,000 in repayments. The threshold would slowly be eaten away by inflation.

So, if you earnt say £15,000 after graduating, then in the first year you would pay nothing.

In the second year your salary would have gone up by 3% to £15,450 so you would pay £450*9% = £41.
In today's prices that £41 would be equal to £41/1.02 (inflation) = £40.

In the third year your salary would be £15,000*1.03^2 so your repayments would be (£15,000*1.03^2 -£15,000) *0.09 and in today's money it would be worth that amount, divided by 1.02^2.

Therefore, the total amount you would pay before the debt was written off (in today's money, if you were earning £15,000 a year) is:

∑ ((£15,000*1.03^K-£15,000)*0.09/1.02^K) from K=0 to K=24
which is £6,866

for someone earning £21,000 a year (the current median salary) it is:
∑ ((£21,000*1.03^K-£21,000)*0.09/1.02^K) from K=0 to K=24
which is £20,366

So what would I have actually paid?

According to the ONS, 50% of the population earn less than £21,000 (£25,000 for only full-time employees)
only 25% earn more than £32,000 a year
and only 10% earn more than £45,000 a year.

If we take these 3 salaries and plug them into our repayments equation we get the following:

earning £21,000 after university: £20,366 (significantly less than the headline £27,000 of "debt")
earning £32,000 after university: £45,116 (an awful lot more than the headline £27,000 of "debt")
earning £45,000 after university: £31,073 (an awful lot less than the guy earning only £32,000 a year)

The guy on £45,000 pays less because their debt is all paid off after only 11 years. As we can see, the old system resulted in quite expensive degrees for anyone earning above the average salary and also meant that the very well off (those earning £40,000+) actually paid less for their degrees than someone earning only £30,000 a year. I don't think anyone would say that was fair.

The new system

How it works

However, under the new fees system with all the changes outlined above, you would come out of university with £40,000 of "debt", it would be charged inflation of 4% (RPI) plus up to 3% more for higher earners (so the guy on £45,000 a year would pay 7% interest). You would get any debt written off after 30 years and repayments would be 9% above a higher threshold of £21,000 which would be uprated with inflation.

So, if you earnt £21,000 a yar after leaving university. You would pay £0 in the first year

In the second year your salary would have gone up by 3% to £21,630 so you would pay £630*9% = £57. 
In today's prices that £57 would be equal to £38/1.02 (inflation) = £56. 

In the third year your salary would be £21,000*1.03^2 so your repayments would be (£21,000*1.03^2 -£21,000) *0.09 and in today's money it would be worth that amount, divided by 1.02^2.

Therefore, the total amount you would pay before the debt was written off (in today's money, if you were earning £21,000 a year) is:
∑ ((£21,000*1.03^K-£21,000)*0.09/1.02^K) from K=0 to K=29
which is £13,524

So what will I actually pay now that fees have gone up?

Therefore, for a graduate (with £40,000 of "debt" remember):

earning £21,000 a year after university: £13,524 (a hell of a lot less than the £40,000 of "debt")
earning £32,000 a year after university: £43,224 (a bit more than the "debt" but still less than the £45,000 they would have paid under the old system with only £27,000 of "debt")
earning £45,000 a year after university: £51,840 (at that salary the student debt is paid off after 24 years rather than being written off after 30)

Now we come to compare the previous system with the new one.

                                                                  Previous                             Govt. Changes
earning more than 50% of the population:    £20,400                                £13,500
earning more than 75% of the population:    £45,100                                £43,224
earning more than 90% of the population:    £31,100                                £51,800

What we can see here is that you will actually pay LESS for your degree if you earn the same as 80% of the population does. You will ONLY pay more for your degree under the new system if you're in the top 20% of earners. Now, you might still think this is unfair however, as someone who's going to be under the new system, I actually feel better knowing that if I don't quite manage to earn £45,000 a year after university then I will actually pay less for my degree; and to be honest, if I were earning more than £45,000 a year I wouldn't be complaining.

Moreover, when you realise that £18,000 of that debt (from living costs) you would have had to pay whether you were in university or out there earning a living, the "payment" for your degree is actually those figures minus £18,000 which gives us these final tables:

                                                                              Cost of YOUR degree

                                                                  Previous                            Govt. Changes
earning more than 50% of the population:    £2,400                                  £-4,500
earning more than 75% of the population:    £27,100                                £25,224
earning more than 90% of the population:    £13,100                                £33,800

In other words, the maximum amount your degree could possibly cost you is about £35,000 and that's the absolute maximum, and that's over your entire lifetime, that's like what? 2 cars? not really that much when you think about it. Moreover, when you consider that even if you do a degree and it's useless and you're stuck on the average wage for the rest of your life, you will have actually made a profit out of going to University. If you come from a poor background and get the fee waivers worth £18,000 then the profit you could make out of a student loan could conceivably exceed £20,000 even if you have a worthless degree. Therefore, even if your degree is "worthless" in the eyes of employers, you're still not going to be worse off financially for going to University so if like me you're from a pretty poor background, please don't be scared of going to Uni. It's your chance to have a better life and don't let the media scare you into not seizing it.

What you should take away form this is three things.

1) Do not let the media dictate what you think. Newspapers are not there to inform you, they're there to sell themselves, by all means read newspapers, watch news channels, but always ALWAYS do your own research, question the statistics, find out for yourself what the truth is because they will only tell you the bits of the truth they want you to hear. As a general guide, have a look round the think tanks, they do a lot of this kind of thing and will probably be a lot more informative than any newspaper is going to be.

2) Don't be put off going to university. Your degree is only going to have to increase your salary by 5% and it will be worth more than it cost you. Moreover, University is far more valuable than just as a way of earning more money, it's a once in a lifetime experience which you will never have the opportunity to have again. Don't be put off going to university because you're scared about the "lifetime of debt" you keep hearing about. Now that you know the true cost of university (effectively only 3-5% extra income tax for 30 years) you can make an informed decision about if you think it's worth it. If you're worried about the value of your degree, then I would suggest you do a STEM subject (Science, Technology, Engineering, Maths) because those jobs really are worth a lot of money.

3) You should keep up to date with my blog because I will give you my point of view but I'll also give you the information to make up your own mind. Oh yeah, and don't blindly trust the media (did I mention that already?)

Tuition Fees

The last few weeks have seen a lot of strong reactions nationwide on the issue of the raising of tuition fees and what the new system will do to levels of enrolment, social mobility, the arts and whether this will benefit or harm the country and the economy, both in the short term and the long term.

Firstly I would just like to give a brief overview of the old system and the new one. Under the old system, students paid tuition fees of £3,225 or thereabouts depending on the specific university and course, in England, Northern Ireland and non-Welsh students studying in Wales. Welsh students only had to pay £1,285 per year and Scottish students got free university tuition.

 Students could pay the fees upfront if they wished or they could get a student loan (from the Student Loans Company) with an interest rate of 4.4%. Repayments were at least 9% of your annual income over a threshold of £15,000. So, if you earned a salary of £22,000 the first year after university, you would have paid at least 9% of £7,000 = £630 as a repayment for that year. If you still had the loan outstanding after 25 years then the remainder was written off.

Under the new system, there will be a cap of £9,000 a year. This means that fees won't necessarily rise to £9,000 however, it seems likely that a large number of the top universities intend to do so and many more might as well. The government has said that any university charging more than £6,000 a year will have to take extra measures to provide access to students from poorer backgrounds. What this means is that virtually all universities will likely raise fees to £6,000 a year while some of the more prestigious will raise them further still.

These fees will only apply in England as education is a devolved issue for Wales, Scotland and Northern Ireland although all 3 have said that in light of these changes they might also raise their fees but this is by no means certain. Unlike the old system, no students will have to pay their fees upfront (part-time students did under the old system) and repayments will be a fixed 9% of your salary above £21,000 per year. Interest will be charged at the rate of inflation (Retail Prices Index) + up to an extra 3% for higher salaries. Any debt outstanding after 30 years will be written off.

So, should students be applauding or, as they have been, hurling abuse at the changes?

Obviously, the size of student debt is going to be far more substantial with debt for a 3-year course likely to top £40,000 (including living costs). This is irrelevant. Very few students ever paid back their loans fully under the old system before they were written off so the increase in debt will only affect those on the highest salaries (who I think we can all agree don't need to worry about paying back their debts anyway). Under the new system you would have to earn an average salary of £45,000 a year for 30 years to pay off your debt (which would mean you were earning more than 90% of the population) so for the vast majority of students the question will be, will I pay less over 30 years than I would have under the old system? The answer is surprisingly straightforward. If your average salary is less than £35,000 you pay less in total under the new system and if you earn more you will pay more.This is because the threshold has been raised to £21,000 rather than the old £15,000 so your yearly repayments are lower. 

DO NOT WORRY ABOUT THE SIZE OF YOUR DEBT BECAUSE THIS DEBT IS NOT DEBT. IT IS EFFECTIVELY A GRADUATE TAX. All your student debt will mean is that you'll pay from 0-5% of your total salary as contributions for 30 years after leaving university and it will then be written off.

The new system, despite how it has been maligned in the press, is actually rather progressive. This is because it means that how much you pay for your degree is based entirely on how much you earn after university rather than how much money you or your parents had before university. In other words, even if you were dirt poor, you could take out a student loan, get a degree and not worry because if you could only get a minimum wage job, you'd pay nothing for your degree, if you got a well-paid job, great,  you'd pay an extra 3-5% in tax but you'd have a decent job and a decent salary and if you got a very well-paid job yes, you'd pay 6-7% in tax but you'd still have a great salary and a far better standard of living than when you were growing up. So, if you're a poor student you can go to university safe in the knowledge that you would only pay for your degree if you could afford to and, even better, those who get the highest salaries will be the ones who pay the most for their degrees, almost certainly the fairest way of implementing any tax. For those who still think the new system is unfair, I would just like to point out that 30% of students will pay less for their degrees under the new system and these will be the ones with the lowest salaries after university, I think it is hard to argue that the poorest paying less isn't progressive.

There are however, 3 problems. Firstly, while the proposals are good, the way they have been portrayed is a damning indictment of this country's media. There has been an enormous focus on "£40,000 of debt" and "tripled fees" with no recognition of the fact that few students will actually pay much of the increase before the debt is written off in 30 years time. This misreporting is certain to discourage poorer students from attending university which will irrevocably harm social mobility because the media prefer bold headlines and shock stories over substance. The massive numbers of young people protesting the rise in fees is ample evidence of the lack of understanding among young people and it is of great detriment to the economic future of this country that poor students will be deterred from university due to a lack of information and advice about what the fees system actually means for them.

There is also, although this is a different but related issue, a problem with the government's proposals to cut the teaching grant to all but the STEM (Science, Technology, Engineering, Mathematics) subjects. The government intend for the shortfall to be made up in fees however, since students won't pay back most of their fees, the government will end up paying most of the fees anyway so the end result will be a shifting of university funding towards the STEM subjects and away from other subjects. Whilst I recognise that the STEM subjects are the most beneficial to economic growth there are a whole plethora of subjects such as medicine, law, architecture, economics and many others which are also vital to our economy. There are very few subjects that don't aid the economy and those that (arguably) don't often are the ones that contribute most to our culture and whilst I readily welcome an increase in funding for STEM subjects, I think that taking funding away from other subjects is detrimental to the future of our economy and the wealth of culture which makes this country so unique.

The last issue is one of trust. Whilst the new system may be fairer than the old one and whilst it will benefit the poorest graduates and is ultimately more progressive, the Liberal Democrats, each and every one of them, made a campaign pledge not just to not raise fees but to vote against any increase. To go from voting against any increase to tripling fees seems like a betrayal of all the students who voted for them. It is vital to the future of our country that politicians are accountable to the electorate and that they implement what they are elected to do. Politicians must always remember their job is to represent us and so they must be reminded that reneging on promises during the election is not what we elected them to do.

On the other hand, it should be said that perhaps this was the best the lib dems could get. After all, the conservatives wanted unlimited tuition fees so a raise of only £6,000 a year doesn't seem so bad. It should also be noted that perhaps (as in this case) the govt. are actually helping the people who are even now planning more mass protests and so, whilst they may not have implemented the specifics of what they said, the overall effect has been beneficial.

To conclude, welcome the new proposals because they are more progressive than the old ones and, if reported correctly, will encourage social mobility but campaign for the government not to take funding away from non-STEM subjects and think carefully about the liberal democrats, about whether you prefer a government that implements policies it thinks will be damaging because the public insist on it, or a government that does what it thinks is best for the voters, regardless of what the voters think. There is no right answer to that question but it is one everyone liberal democrat voter should be asking themselves and the answer will ultimately determine their future (or lack thereof) as a significant force in uk politics.