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How much will you pay for a university education? - So who will be better off under the new scheme - and who will pay more?

December 13, 2010 10:15 AM
In The Telegraph

graphsSixth formers - and their parents - were no doubt watching Thursday's House of Commons vote on university tuition fees with keen interest.

As expected, MPs voted to raise the cap on tuition fees from £3,290 to £9,000 a year. As a result, anyone with children aged 17 or less faces the likelihood of bigger bills to get them through university. Although some institutions may not charge the full £9,000, it looks a racing certainty that the top universities will charge the maximum fee.

So students starting a three-year degree in September 2012 - when the new charging structure will be introduced - could be facing tuition fees alone of £27,000, before any accommodation or living expenses are taken into account.

As is the case now, students will be offered loans to cover both tuition fees and maintenance costs.

These changes will increase pressure on university places for the next academic year. Few people are now expected to defer a university place and opt for a gap year, as travelling around south-east Asia is likely to cost them an extra £18,000 in tuition fees on top of the price of the trip itself.

But the Department for Business, Innovation & Skills (BIS) said today's A level students should look at more than just the headline cap on tuition fees. Ministers argue that the "progressive" nature of other changes introduced will mean that some students pay less under the new regime, and may want to defer instead.

So who will be better off under the new scheme - and who will pay more?

Sadly, it is not easy for individuals to identify whether they will benefit. Much will depend on what graduates go on to earn and how rapidly they progress in their careers. For the average sixth former, who may have little idea of what job he or she will get, let alone what it is likely to pay, this isn't particularly helpful.

The matter is further complicated by the fact that several key issues are still to be finalised - and there were numerous changes this week in the run-up to the vote. These related to when students would have to repay the loans, and the exact interest rate charged.

Under the Government's proposals, graduates will start repaying their loans only when their earnings reach £21,000 a year - rather than the current threshold of £15,000. As happens now, graduates will then repay 9p in every £1 they earn above this limit, with the repayments automatically deducted through their payroll.

This will have the effect of lowering monthly repayments, particularly for those on lower earnings. Under the current system, graduates earning £16,000, say, will be making monthly repayments towards their student loan, but would pay nothing under the new system. At earnings of £21,500, say, they would pay £52 a month under the current scheme but just £4 a month under the new scheme. If pay drops back below the £21,000 threshold, repayments will be frozen again.

However, it should be borne in mind that paying less per month will, in most cases, extend the life of the loan and increase overall borrowing costs.

Under the new scheme, loans will be written off after 30 years, rather than 25 years as at present.

Costs will be further increased by plans to charge interest on these (significantly larger) loans. Currently, the interest rate is linked to the retail prices index (RPI). In theory, this means that student loans are effectively interest-free, with graduates repaying in real terms what they borrowed. (In practice, this doesn't always happen as, for example, you don't get negative interest rates during periods of deflation.)

Under the new system though, graduates will be charged interest over and above RPI. The rate will be "progressive", so those earning more will be charged a higher interest rate. Those earning less than £21,000 - and therefore not starting to make repayments - will still be charged just the flat RPI rate, but once graduates' salaries top £41,000 they will pay the maximum of RPI plus three percentage points.

A spokesman for BIS said: "One of the issues that prospective students need to think about is what would suit them better: to clear their debt quicker, or to keep more of the money they earn when they are starting their careers and are on a lower salary."

He said repaying debts over a longer period might increase the total cost, but many graduates would not repay their loans in full. He added that the graduates who benefited from higher salaries in their careers would be most able to afford the higher repayments. "Even with the higher interest rates, these loans are still extremely competitive compared with bank loans or credit cards."

The Government argues that the changes make the new funding arrangements more progressive, with those earning less after university paying less under the new scheme. This conclusion is backed by the independent Institute of Fiscal Studies (IFS).

As the graph opposite shows, it is those who end up in the bottom quartile, in terms of lifetime earnings, who will pay less than under the current arrangements. According to BIS, this could benefit those who go into lower paid professions such as social work, or work in the voluntary sector, as well as those who take extended leave from paid employment, for example to raise children.

However, as the National Union of Students (NUS) points out, this apparent benefit comes at some cost. Those who end up paying less are those whose monthly repayments are simply never enough to clear their debts in full. These people will have student debt until they are in their 50s. A spokesman for the NUS said: "This is the first time that saddling our young people with 30 years of debt has been celebrated as a source of progressive pride."

Other beneficiaries will be those from the very poorest families, as the Government has pledged to increase the number of grants and scholarships available. Again it is a complex system that has been put in place, but in some cases those from the poorest backgrounds will effectively be able to have their fees covered for two years - so they would be borrowing only one year's fees (£9,000).

According to the IFS, a total of just under one in four graduates will turn out to pay less under the new scheme - so most will pay more. But neither the Government nor the IFS can easily identify at the outset who will fall into which category. What is certain is that almost all students, regardless of their family's background or their earning potential, will have significantly larger debts than they ever had before.

Some of them will simply never clear them, so may end up better off as a result. But for those aged 17 or under, and their parents, this is unlikely to bring much comfort this Christmas.