The Future Repayment of Career Development Loans in Parallel with Student Loans

The NPC has firm policy against the commercial rate interest non income contingent career development loan being repaid in parallel with the undergraduate loan upon qualification. This article aims to analyse under the present plans how at the extreme levels postgraduates could be repaying their debt following their course, assuming they have continued to postgraduate education straight after graduation.

Career Development Loans are sponsored by the Department for Education and Skills (DfES), where the interest on a loan is paid while the student is still studying but after that it will gain interest and need to be paid back. The arrangements for interest rate, repayment period and any arrangements for deferment are made between the student and the bank who issued the loan, these are not at the discretion of DfES. Many banks offer different Career Development Loans, and they do vary widely, anything from an Annual Percentage Rate (APR) of around 6% through to around 15%. Further to this the repayment period could be anything from 24 months through to 60 months in monthly instalments. For the purpose of this analysis, it is assumed that as a worst case scenario, the lowest possible APR will be considered as 6% and the highest 15% for the purpose of this analysis. Also it will be assumed the shortest repayment period is 24 months and the longest is 60 months. This will give an idea of what extremes a postgraduate could be repaying their student loan and career development loan depending on the annual salary they have after qualifying. A loan can be taken out ranging anything from 300 to 8,000 and eligibility will apply to those undertaking vocational courses only that warrant some reasonable chance of employment; hence they are considered to have the opportunity to develop their career. On paying back the loan, the instalments are calculated by first adding on the annual interest (which will depend on the number of years over which they will pay back the loan) to the original loan for the repayment period and then divide it by the number of months over which the loan will be repaid, rounded down to the nearest penny.

At present, the proposals for the undergraduate student loan from Aim Higher [1] indicate that the current arrangements for the student loan are that the graduate will pay back 9% of their income above the minimum threshold of 15,000. Also there will be interest on their loan only the same as that of inflation.

Given that the undergraduate loan at an extreme could be in the order of 21,000 and that on top of this a further 8,000 could be loaned, this will have significant consequences in terms of the debt burden that will overhang following completion of a postgraduate course. These two loans will have to be paid back in parallel and so this feature will analyse what monthly instalments will have to be paid.

Analysis of Loan Repayments

Suppose a postgraduate starts with an income just above the undergraduate repayment threshold, 15,000. It is assumed for Tax and National Insurance the year 2004/05 tax year figures apply and table A for National Insurance is also applied [2]. For an APR of 6%, the maximum possible Career Development Loan (CDL) value of 8,000 will rise to the values in column 2 in Table 1 if the number of months in the first column are used for payback. The monthly CDL instalments are added onto the monthly undergraduate (UG) instalments in this instance to give a total instalment as the two will be paid back in parallel. Comparing this to monthly income after tax and national insurance, it will be nearly 20% if the longest payback period is applied. If this is shorter, then the payback will be as much as over 40% of monthly income.

table1

If the same table is applied with the APR as high as 15%, then the following figures will apply in Table 2:

table2

In this instance, the percentage of monthly income paid back rises to 47% at the worst extreme with 24 monthly repayments but is as low as 25% with 60 monthly repayments. In this instance, just under 0.5% of monthly income is paid back to the undergraduate loan. This is a scenario where the postgraduate is earning in a way that they are not earning a salary such that they have benefited from their education. If 18,000 is considered closer to the average graduate salary, the monthly income will go up (although it is subject to greater Tax and National Insurance and UG instalments) so that the following would be the case with an APR of 6% in Table 3:

table3

In this instance, the percentage of monthly instalments only decreases by 3% compared to someone earning 15,500 when paid back over a short period, where as, it only decreases by 1% when paying back over 60 months. This is due to increased taxation and higher undergraduate loan repayments. In the case of when the APR is 15%, the situation is also similar as shown in Table 4:

table4

In this instance, the difference in percentage of monthly income is 5% less than that of someone earning 15,500 paying back over 24 months where as when paying back over 60 months, it is 2% less. When earning 18,000, just over 2% of the monthly income is used to pay back the undergraduate loan. In the instance of earning 18,000, the postgraduate has still not benefited from extending their education since they could still earn this amount as a graduate. Therefore, suppose they have had some benefit with a salary of 25,000. The same analysis can be carried out to see what financial benefit there is in this instance for an APR of 6% in Table 5:

table5

Compared to someone earning 18,000 there is a 7% drop in proportion of monthly instalments when paying back over 24 months where as when paying back over 60 months, the drop is only 1%. If an APR of 15% is considered, the following results in Table 6:

table6

Compared to an 18,000 salary, there is an 8% drop in proportion of monthly income paying back by instalments over 24 months where as in the case of a 60 month repayment there is only a 2% drop. Just over 5% of their monthly income for 25,000 salary is spent repaying the undergraduate loan.

Conclusions

A comparison of repayments of a Career Development Loan with varying interest rate and monthly repayment periods are compared with the monthly repayments of an undergraduate loan proposed in the 2004 higher education bill. Results indicate that a small proportion of monthly income will be used to repay undergraduate loans, although a significant amount will be added on by the monthly instalments of a career development loan. Regardless of what salary is earned after graduation, around 18% of monthly income will be paid back for a repayment period of 60 months and APR of 6% where as with an APR of 15% it will be around 23%. This is due to the increase in tax, national insurance and undergraduate loan instalments when earning higher salaries. If the repayment period is as short as 24 months, it will vary more widely dependant on salary ranging from 30% to 40% increasing as salary reduces with an APR of 6%. If the APR is 15% monthly repayments will range from roughly 35% through to 50% of monthly income.

The variability of career development loans indicate that, especially if they have short repayment periods or high APR, then a significant proportion high above undergraduate loan repayments will have to be paid in addition. An extension of the student loan to postgraduates would clearly reduce this so that less than 10% of any monthly income would go to repayments if the same repayment conditions applied for postgraduate courses.

References

  1. http://www.aimhigher.ac.uk/en/student_finance/studentloanrepayment.cfm
  2. http://www.inlandrevenue.gov.uk/nic/tables04_05.htm