AN UNSUBSIDISED INTEREST RATE: HOW MUCH EXTRA
88. What is the effect on repayments if
graduates pay an interest rate equal to the government's cost
of borrowing rather than (as currently) the rate of inflation?
89. Answer 1: Monthly repayments. The
change has no effect on a graduate's monthly repayments. Since
loans are income-contingent, repayments depend only a person's
monthly income. Thus the higher interest rate affects the duration
of repayments but not the amount of the monthly repayment.
90. Answer 2: Total repayments. On average,
it is estimated that students will take 15-20 years to repay their
loans (since the system of income-contingent repayments is new,
estimates are all that we have). The model referred to in paragraph
37, estimates that at today's prices if a graduate takes 15 years
to repay his loan, the extra interest payments on a loan of £12,000
from removing the interest subsidy is about £3,700. The comparable
figure if he takes 20 years to repay is £4,700. Thus a plausible
estimate of the additional interest repayments of an average student
taking 17½ years to repay is £4,250.
91. Some comparators. These numbers need
to be seen in context.
With even a modest graduate premium
(15 per cent) and real wage growth (including career progression)
of 5 per cent, a graduate will earn £270,000 more than a
non-graduate over a 35-year career. The extra interest payments
are a minuscule price for those benefits.
Over 35 years, a non-graduate on
average earnings pays about £520,000 in income tax and national
insurance contributions; with a graduate premium of 15 per cent,
the equivalent figure for a graduate is about £600,000. Thus
the additional interest payment is equivalent to a tax increase
of about 0.7 per cent.
Over the lifetime of the average
loan, a graduate will spend on average £25,000 on alcohol.
To spend £25,000 out of after-tax income a person paying
basic rate income tax etc, has to earn £37,000. Thus it would
be possible to finance the additional interest payments by having
one booze-free day per week till the loan has been paid off.
92. The figures in the previous two paragraphs
are in cash terms. The equivalent figures in present value terms,
at a 5 per cent discount rate, are as follows. On a loan of £12,000,
the present value of the extra interest payments is £2,880
over 15 years, or £3,350 over 20 years; thus the average
student will pay around £3,115 in additional interest payments.
Over a 35-year career, the extra earnings of a graduate are £105,000.
The present value of the income tax and NICs paid over 35 years
by a non-graduate on average earnings is £195,000; for a
graduate the comparable figure is £228,000. The present value
of expenditure on alcohol over 17½ years by an average graduate
is £14,000, requiring pre-tax earnings of nearly £21,000.