Bankers fare better than public servants under Browne plans

Graduates who choose a public service career over the City will be worse hit by Lord Browne's proposals, explains Left Foot Forward's Will Straw.

Graduates who choose a public service career over the City will be worse hit by Lord Browne’s proposals. Although those on lower incomes will pay back a smaller proportion of their loans, graduates in top paying jobs will end up making smaller contributions than students on middle incomes.

The Browne review recommends scrapping interest free loans and introducing a market rate of interest worth 2.2 per cent. Under the current arrangement, the average student debt of £13,500 over a three year course remains £13,500 in real terms if left unpaid. But under Lord Browne’s plans, the compound interest paid over the 30 year period will almost double the value of the debt. Average debt is expected to rise to £30,000 – over 30 years, the value of the loan if no contributions are made will be £57,630.

In practice, no individual will pay back that figure since annual payments are capped at 9 per cent of earnings above £21,000.

Nonetheless, some career paths will result in higher contributions than others due to the market rates on the loans. Once again it is the middle who will get squeezed:

– A teacher starting on £20,000 with a salary rise of £1,000 every year will pay back £39,150 over 30 years;

– A ‘fast track’ civil servant starting on £25,000 with a salary rise of £1,000 every year will make £44,600 £47,500 in contributions over 30 years;

– A blue chip business trainee starting on £40,000 with a salary rise of £2,000 every year will pay back £31,700 £35,400 over just 12 years; and

– A banker starting on £60,000 with a salary rise of £3,000 every year will pay back just £27,900 £33,000 over seven years.

The result is that while students choosing career paths which pay under the national average will do relatively well from the arrangements, graduates in the middle will fare worse than those who choose lucrative careers in business or finance.

NB: I’ve just spotted that my model excluded the final year payments for those earners who were able to pay off the principal before the 30 year period ended. The spreadsheet can be downloaded here for anyone who wants to play around with their own numbers. The central point, however, still stands.

An earlier version of this piece appeared online automatically before our calculations were complete.

40 Responses to “Bankers fare better than public servants under Browne plans”

  1. ksloyan

    RT @leftfootfwd: Bankers fare better than public servants under Browne plans http://bit.ly/dcn69F

  2. Liberal Vision » Blog Archive » Three cheers for the Browne review

    […] from those who haven’t read it, or are wedded to unworkable and regressive systems like the graduate tax or pure state funding. From this corner we hope the government adopt the proposal in full, as an […]

  3. Paul Jeater

    RT @leftfootfwd: Bankers fare better than public servants under Browne plans http://bit.ly/dn4IPG

  4. Alasdair

    Just to be pedantic for a moment, for no particularly good reason, your 25K+1 calculation takes payments from the previous years wages each year. So the first two years both repay £360 (9% of £25,000-£21,000), rather than £360 then £450, for example. Over the course of the 30 years, that means you’ve calculated they pay ~£3000 more (the real repayment figure being just over £44,000). Which I suppose shows the cumulative effect of a year’s wage freeze. Something we should remember in the current climate.

    Of course, the figures are all rough and the basic point that if you can pay back quicker you pay much less remains just as true, and as important, whatever assumptions you take.

  5. Matt

    Anon E Mouse – Actually, I think you completely miss the point. What bankers may or may not pay in income tax is irrelevant. The point is that their university education should not be cheaper than that of others who find themselves on less lucrative career paths (quite the opposite, if anything). As Will accurately demonstrates, it will be. And that is wrong.

Comments are closed.