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PostPosted: Mon Sep 25, 2017 6:02 pm 
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It is said to have been Albert Einstein who called compound interest “the eighth wonder of the world”, and at this time of the year when some 400,000 fresh faced students are about to set off to university for the first time, they and their parents would be well advised to study what he meant.

Thanks to the application of compound interest to their student loans, this year’s new students will be faced with truly awesome debts, of a size which few of them have troubled to contemplate.

With maximum fees of £9250 per annum being applied by many universities, and a living allowance of £4193, on graduating after three years, including interest will already owe £45452. Those on four year courses (such an engineering and modern languages), and those studying in London will owe more.

If they are then lucky enough to get a job earning £31,000 per annum (more than the typical starting salary) repayments of £900 will be made in the first year, but interest of £2772 will have been charged and their debt will have grown by a further £1872. A real high flier with a salary of £41,000 will repay £1800 per annum (or £54,000 over the next thirty years) without having made any dent in their debt.

In fact you will have to be earning £51,800 per annum just to be covering the interest each year and stopping the debt getting even larger, and at that income, your total repayments (in other words what you will have paid to go to university) will be £83,160.

At the other end of the scale, those whose income never exceeds the repayment threshold of £21,000 per annum will accumulate debts of £279,455 over the thirty year course of the loan, and quite who will then be responsible for this debt is unclear, although one way or another it will eventually fall on the taxpayer.

Of course those who after graduating engage in further study, perhaps a masters degree and then a PhD may emerge from education with much larger debts, typically around £100,000. Suppose someone then pursues a career in academic science, where starting salaries for junior researchers are often quite low, even for those with higher degrees; if their salary remained under the £21,000 repayment threshold for ten years, they would owe £279,000. If they then obtained a really high flying job, the repayments might be large, but so would the interest accumulating each year.

Take an imaginary example of someone in that situation being appointed Vice Chancellor of Reading University on a salary of £261,000 per annum. They would repay £21,000 per annum, but the interest charges would be £17,000, so that their debt would diminish by a mere £4,000. It would be touch and go as to whether even at that salary they would ever repay their full debt, even though they would have repaid some £420,000 .

All of this assumes, that inflation (to which the interest rates are linked) remains at 3.1%. Some of us are old enough to remember interest rates of 10%, but thanks to the impact of compound interest, even a modest rise in inflation will make all of the above figures even more frightening.

In the meantime, I can only suggest to prospective students and their parents that they start refreshing their memory as to how Einstein’s eighth wonder of world is calculated.

Dr Barry Monk
http://www2.politicalbetting.com/index. ... e-problem/


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PostPosted: Mon Sep 25, 2017 6:51 pm 
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I really don't think this is very helpful to those about to start out on their University careers.

May I suggest that anyone who is looking for a balanced view of what is certainly a complex issue has a read of the money saving expert article online.


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PostPosted: Mon Sep 25, 2017 7:00 pm 
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The wonder of compound interest is kinder to those who can save. Quite small monthly amounts saved from a child's early years might accumulate a lump sum far far more easily than it is to eliminate debt once it has been accrued. Those with older children may have to save larger amounts to get the same lump sum but they can also benefit from compound magic. I think education is the key and thinking carefully about how to minimise the debt that a student takes on. I'm surprised more people don't talk about that side of things - it is not obligatory that everyone takes out the maximum loan!


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PostPosted: Mon Sep 25, 2017 7:53 pm 
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It's not necessary to take the full loan but it's difficult to manage on less without outside help.
Besides which it may be better to take the full loan than not.
You are absolutely right that students and parents need to be informed to make the best choice for their circumstances. Even then, with so many unknowns it's difficult to decide.
What is unhelpful is scaremongering and headlines as recently that focus on the interest rate rather than the level of earnings at which repayments kick in.


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PostPosted: Mon Sep 25, 2017 7:57 pm 
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I second reading the money supermarket information on this. Puts it all into perspective, including the huge numbers who actually never have to pay the debt back. As someone who is debt averse inthe extreme, the MSM info completely reassured me.


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PostPosted: Mon Sep 25, 2017 8:02 pm 
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Location: Reading
http://www.moneysavingexpert.com/studen ... udent-loan

For those interested in the moneysavingexpert article mentioned


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PostPosted: Mon Sep 25, 2017 8:38 pm 
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I don't think it's something to scare potential students but it ought to frighten the living daylights out of economists and politicians. The current system is completely unsustainable, it's a blatant Ponzi scheme.


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PostPosted: Mon Sep 25, 2017 8:59 pm 
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Location: london
mike1880 wrote:
I don't think it's something to scare potential students but it ought to frighten the living daylights out of economists and politicians. The current system is completely unsustainable, it's a blatant Ponzi scheme.

+1

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PostPosted: Mon Sep 25, 2017 9:02 pm 
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Something to be aware of is that the amount earned before paying it back could change as could the interest rate.


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PostPosted: Mon Sep 25, 2017 9:31 pm 
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In effect the threshold at which you start paying has changed in so far as it was supposed to rise over time but it's been frozen.

It's ironic that there's been a backlash against unscrupulous lenders while the government charges whatever rate takes its fancy :)


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