Wednesday, 3 December 2014

Master's in Finance

Nobody could have been surprised that the Chancellor announced loans for postgraduate students in today’s autumn statement. But the details that we know deserve a bit of consideration.

1.3% of the available postgraduate loan
First, the announcement – an income-contingent loan, at real but better than market rates, of up to £10k, available to people under 30 starting a taught postgraduate course from 2016. Subject to consultation and details. The modelling suggests an interest rate of RPI+3%, which isn’t a bad rate. Repayment would be thought the existing Student Loans Company mechanisms, with repayments starting at £21k salary, with 9% of salary above £21k taken as repayment.

This has been a long time coming – the NUS and universities have been campaigning for a while, and since the introduction of the higher fees in 2012 it was clear that there would be a pressure on Master’s degree enrolments when people were graduating with substantial SLC debt.

One interesting aspect is the age limit. Prior speculation had been that the loans would be available only for STEMM (science, technology, engineering, mathematics and medicine) subjects. That they will be available for all subjects is a victory for humanities and social science lobbying, but the age cap may have been a necessary corollary: the loans are intended to be self-financing.

Also of interest is the question of possible discrimination. If it turns out that the loans are not self-financing (and we know how robust RAB calculations are in relation to student loans) where is the justification for stretching the Equality Act protection of age?

David Kernohan spotted in the Treasury’s underlying calculations that the loans are also predicated on a slowing of the rate of growth of PGT students – from 2% annually to 1%. My guess is that this is necessary to make them look self-financing over a sufficiently short timescale: if growth is larger, sooner, then the up-front cost will hurt Treasury. If there’s a cap on PGT numbers in four years’ time remember that you read it here first!

What will the repayments feel like? If we assume someone earning £24k per year, then with just an undergraduate degree and associated loans they’d be repaying £22.50 monthly on a gross monthly salary of £2000. And the same person with a Master’s degree would pay £45 monthly on the same gross salary – a marginal rate of 2.25%, and the size of a monthly contract for a flashy mobile phone. A first-degree holder earning £36k per year would pay £112.50 on a monthly gross salary of £3,000; the same person with a Master’s degree would pay £225 per month – a marginal rate of 7.5% and more like the monthly repayments on a car. So, progressive taxation, up to a point, and also noticeable by the individual.

It’s important though to bear in mind that current students are already paying: whether it’s borrowing from parents and family; saving for a couple of years; or working during study (or all of the above). It’s unquestionably a good thing that these loans will be available, but at £10k they won’t pay the full costs.  It’s an amelioration of financial problems, not a complete solution.

It’ll also be interesting to see whether this becomes an election issue: will the other parties promise to do this also, or does it become an uncertainty. My guess is that Nick Clegg will not want to talk about this: too many bad memories for him!

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