Bankers fare better than public servants under Browne plans

Public Services

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.

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

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  2. Alex

    Except your analysis is nonsense. If interest accrues at a “market rate” on the outstanding balance, then assuming the loan is always paid off, the present value of the payments discounted at a market rate of interest is aleways the same figure, £30,000.

  3. Why Lord Browne has got his numbers wrong | Left Foot Forward

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  4. Mark Curry

    Your assumptions are flawed.

    You assume that the graduates all have incurred the same level of indebtedness – this is highly unlikely. High flying bankers are usually recruited from Russell Group/1994 Group Universities – fees there are likely to be significantly higher than elsewhere. (Possibly £8-12K compared with £5-£7 per year elsewhere)

    Also teachers’ starting salary is NOT £20,000 per year it is £21,588 (£27,000 in London) and your annual pay increase of £1,00 per year is pure nonsense.

    http://www.tda.gov.uk/get-into-teaching/salary/starting-salary.aspx

    The alternative is to try being a teacher who is not a graduate or qualified – if you could possibly get a teaching job your starting salary would be £15,817 and could only reach a maximum of £25,016 – that makes an investment in your higher education over 30 years seem imminently sensible and straightforward.

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