I suppose its not unnatural that those of us with children in universities tend to take a close interest in student finance, not least because we are usually the Lender of Last Resort, though I use the term Lender with an added smile as lending usually implies getting said money back. Anyway, for all sorts of reasons many of us have chosen to do the 50/50 financing structure. By this mean we privately fund the living costs (the old maintenance allowance) while the student still uses the Student Finance England loan for the tuition fees. The logic for this used to be rational as the reforms to student finance mean that there was always a very decent chance that said student would never pay back what they owed.
Slowly over time that calculus has changed, partly I suspect because the Treasury has also wised up to the fact that the great mountain of student debt will never get repaid – and at some point the outstanding debt might have to be socialised. For me, political spoiler alert, this backs up my long held view that we should have a fully fledged, in name, graduate student tax which does away with all talk of debt and simply admits what we all know. That these are NOT student loans and that most will not get repaid.
Anyway with that hobbyhorse out of the way, let me come to an observation. Up till now many students, like my kids, have been happy to go down the 50/50 route because they have also thought that the accumulated debt is manageable and that the interest rates are doable. There are absolutely many poorer students who have been put off – though I think less than the critics sometimes charge. And there’s also a vocal group who maintain that the burden of repayment is too high and a drain on younger peoples finances.
I suspect the validity of that last argument depends on individual circumstances, so I make no comment, but I do think we might be fast approaching a point where even those students with generous Lenders of Last resort might be having second thoughts.
RPI, that’s why.
At the moment student debt piles up and interest is charged at “Retail Price Index (RPI) plus up to 3%”. You can see the calculations here: https://www.gov.uk/repaying-your-student-loan/what-you-pay.
But you may just have noticed that RPI rates are shooting up. And the inflation markets that attempt to guess future RPI rates think they’ll go even higher.
At this point I must hat tip to Jasper F for the following note.
He sent over the chart below which shows the BBG chart of the UK RPI Inflation rate for Mar21-22 as traded in the inflation swaps market. Notice how it has risen in the last 6 months. It peaked at 6.72% this week.
Now, it’s important to say that these are these are not expectations as such but demand / supply interactions but as Jasper says “given that the first 6 months of this period is already known (price increases from Mar 21- Sep 21) it’s a fairly robust data point. The annual March 2022 fix (ie when the inflation for March 21-22 is known) will determine student loans starting in Sep 22”. My source also adds that “the Mar 22 point is not unique, almost all the prices/ inflation rates for next year (Apr21-22, Sep 21-22 etc) are over 6%”.
This implies that the student loan rate could hit 10% for students.
Now there is a cap mechanism in place if the government thinks rates have got out of kilter (and students start to panic) but I’m not too sure the private sector buyers of said debt will be terrifically pleased if the government unilaterally decides to cap rates (like energy prices). If they did, I think it might have the same impact the energy price cap has had – drive buyers of debt out of the market. Which in turn makes the idea of student loans all the more unpalatable and possibly ushers in the event many of us have been hoping for – scrapping the ludicrous idea of student debt and replacing with a pure tax with no mention of debt.
Move over Insulate Britain (and their pointless exercise in grandstanding), lets get the students out on the streets. That’ll really make BoJo worry.