The financial education debate – in full
Below is a cut and paste of the Hansard transcript of last week’s debate (source: Parliament). For those wanting a quick summary see my financial education debate – who said what blog, as the transcript below came from five hours of debate.
You can also watch a video of the session.
Financial education in the House of Commons – who said what
Proof 100,000 people can make a difference. Yesterday I spent five hours in the gallery of the House of Commons on the back of the e-petition many of you signed about putting financial education on the national curriculum. Time and time again the MPs referred to the signatures and the copious letters MoneySavers had written and it seemed to have impressed.
The key outcome was that the Education Minister Nick Gibb sat through the debate, listened and made the important commitment that the APPG Financial Education Report would be considered as part of the National Curriculum review. While this doesn’t guarantee anything it’s a big step forward in treating it seriously.
I must admit to being impressed at the quality of the debate by the small but passionate group of MPs who were there for the debate (the problem with there only being a one line whip and a by-election). In many ways this is when parliament impresses, both sides of the house discussing together in a non-adversarial way and making many key points.
I hope to be able to get the text of the debate from Hansard and publish that here, but I thought I’d put the key points here and some of the most important and funniest quotes I managed to scribble down (no laptops allowed so it wasn’t easy).
One shocking stat that came up during the enquiry was that misunderstanding of basic concepts of APR are so rife, some students were even boasting about who had the highest APR loans – thinking that this made them better!
It’s worth noting there were a huge number of (well deserved) plaudits for Justin Tomlinson MP who chairs the all party parliamentary group and proposed the motion, and Andrew Percy MP who chaired the report writing committee.
Please forgive the scrappy nature of these notes.
Justin Tomlinson MP – proposing the motion
Justin went through the history of All Party Parliamentary Group, the involvement of MSE and PFEG.
"I asked a question on this in Parliament and was approached by the Personal Finance Education Group who said, we’ve thirty more questions you can ask if you like. I put those forward and was then approached by Martin Lewis who said, ‘you’ve asked some really pertinent questions can we speak about this.’
"After that the three of us got together and worked out we need to do something more. And with the subtle persuasion of MoneySavingExpert’s six million email recipients we managed to get over 200 MPs on board and form the new All Party Parliamentary Group"
He then outlined the main report proposals, which due to my lack of note taking speed I’m reproducing here from the report’s summary…
• Personal finance education should be a compulsory part of every school’s curriculum.
• Resources produced by outside organisations and visits of providers to schools should be available
and accessible if considered helpful by teachers and quality marked by a trusted body.
• Primary teachers should build upon their teaching of basic money and mathematics skills from
an early age across the curriculum in preparation for secondary education.
• We welcome the Government’s current proposal to increase the minimum requirement of
mathematics GCSE to grade B for primary school teachers and encourage that it should be
adopted.
• It would be advantageous to use the opportunity of training days to refresh the mathematics skills
of primary school teachers, although we respect the right of the schools to provide training in a
way they feel is appropriate.
• Personal finance education should be taught cross-curricular in mathematics and PSHE secondary education
with the financial numeracy aspect of personal finance education situated in mathematics and
subjective aspects taught in PSHE education. It should be packaged in an obvious and clear way
to young people.
• Personal finance elements of maths should be clearly highlighted to emphasise how they relate
to real life decisions. If viable, the Government should implement the Smith Report and Maths
Review’s recommendation for the twin GCSEs: ‘Application of Mathematics’ and ‘Methods in
Mathematics’ to improve financial numeracy and ensure it is examined.
• PSHE education should be clearly defined into four separate strands, one of which should be
personal finance. Through reworking the PSHE education syllabus, more focused training and
assessment can be developed.
• A school coordinator, or ‘Champion’, should be appointed in each school, preferably from the
Senior Leadership Team. This ‘Champion’ should be given responsibility for ensuring that outcomes
are achieved across maths and PSHE education, ensuring there is a clear link between the
elements of personal finance taught in mathematics and PSHE education and for sourcing
resources.
The stat that really stood out on this was that "91% of people in financial difficulty think had they been better educated, they would’ve had less issues."
Jenny Chapman MP – seconding the motion
"Even more people are coming to surgeries with financial problems than ever before."
"We must think about the teacher training needed to get this to work, many teachers say they lack the confidence in this subject."
"It should be examined because it gives a sharper focus. As one head teacher said in giving evidence ‘Unless you examine it, it won’t happen.’"
Nick Gibb MP – Education Minister responding
"Thank you for the balanced and passionate APPG report and the powerful advocacy from Justin, Andrew and Martin Lewis. The government is involved in two reviews; the National Curriculum and PSHE. The APPG report gives good insights and recommendations and we will look at it as part of the National Curriculum Review. It is an important report – grounded in knowledge and data. There is huge enthusiasm for this. We will give careful consideration to it and all its recommendations."
"Young people are growing up in a materialistic world where they are not truly prepared."
He then was especially impressed with the example calculations in the report that were real mathematics – this is a big part of government policy, the aim to improve numeracy skills.
There were many interventions by MPs explaining that they thought the introduction of financial numeracy in maths would actually benefit maths itself, as with it being more tangible a subject it should retain kids’ interest better.
The outstanding quote for me – Yvonne Fovargue MP
Perhaps the one quote that stood out for me most, was from the always worth listening to Yvonne Fovargue MP. She ran a Citizens Advice bureau for ten years and when it comes to debt and money issues, she really knows what she’s talking about.
"When I ran a financial education project at my bureau, one of the side effects was an rapid increase in the number of parents who came seeking debt help. It seemed that the children were coming home and discussing the subject and it helped the parents realise there’s a problem. So if we do this we need to ensure there are enough debt help resources to make this work."
In itself this proves that financial education works, not just for the future but has an immediate beneficial impact on families too. It’s a great way to get the information out there. This echoes my own experiences of teaching the teen cash class in schools – where the kids went home and could save their parents money and in one case even took over the family budget.
Andrew Percy MP – Chair of the APPG report
A hilarious blockbuster opening from Andrew: "I’d promised the minister that unless he took the report seriously I would douse myself with petrol and set myself alight. Thankfully he’s here so that’s not needed. This is especially important because considering the current prices I couldn’t afford the petrol."
Andrew then explained that he was useless with money, had been in debt during his prior career as a teacher (he’s part of the new intake of MPs) and was still paying it off, and had only just got on the housing ladder.
"I’m extremely proud of having been in the top set in maths in my inner city comprehensive and managed to get a grade C in maths GCSE, but I am still incapable of working out interest and APR."
He then explained that he thought this was perhaps the most important thing he’d contributed to since coming to Parliament. In a witty exchange he explained how he and Justin Tomlinson MP were the perfect pair to be doing this, as Justin (who he also shares a flat with when at Parliament) is extremely financially numerate (many good natured cat calls of ‘tight’), whereas he simply doesn’t understand how personal finance works.
He then made an eloquent case for how it’s important that we don’t assume even clever people should be able to understand finance without education before setting out the mechanics of how the APPG’s recommendations will work. His most important point was that this should be "teacher led", but should work within the current curriculum within maths and PSHE.
Many MPs on both sides mentioned their support for a double GCSE maths, (similar to there being English Literature and English Language) one in applied maths where financial numeracy would fit in and one in more theoretical maths. He also discussed the partial banning of calculators in primary schools to help develop better mental arithmetic.
He believes that the plans would not only help financial education but that it should encourage better basic numeracy. Plus, it would also help views of PSHE as if that’s there to support maths, it gives it more credibility. Then some stats:
"At 17 half of the people surveyed had already been in debt. 70% of 18 to 24 year olds were in debt. 90% of parents never discussed with their teens how to spend. The lack of financial education is costing £250m a year in bank charges alone.
The best of the rest
At this point I need to apologise to the rest of the MPs. With no short hand and no laptop my RSI meant two hours worth of notes were enough for me. So here’s some of the other contributions to the best of my recollection.
The shadow education minister Kevin Brennan MP strongly supported the concept – though questioned how it would be possible to make it compulsory considering the Government devolving responsibility to individual schools through academy and free school schemes.
Congleton MP Fiona Bruce has long been a supporter of financial education and spoke about it a year ago. She explained how it was being done in 20 other countries even including Zambia and how important it was that the UK didn’t fall behind.
Big political beast John Redwood MP made an intervention at one point just to say something like: "I want to congratulate my colleagues on this debate. I have had emails from three constituents urging me to attend and I want to express my support for this important issue." I think that’s proof that MoneySavers emails to MPs had the right effect.
Andrew Bingham MP made a detailed speech. He was passionate on the subject of life skills having even once authored a free e-book to try and guide students when they stated uni. The most popular bit of it was the budget planner (see MSE’s free budget planner here).
While he accepted financial education wasn’t a cure, he said it should enable people to assess if something is a good deal for them and what the total cost is. "Education needs to move forward to protect us in our ever more dense financial jungle."
Eric Ollerenshaw MP was another former teacher supporting the concept (and another one who admitted he wasn’t much cop with cash). "I can’t remember ever being taught anything about financial education at school. I can’t remember anyone teaching financial education in my 27 years as a teacher. It needs to be included within teacher training."
Mark Garnier MP – a thorough speech from a former investment banker and member of Treasury Select Committee and the APPG enquiry committee. His main focus was how Financial Education could solve the problem of irresponsible lending to irresponsible borrowers. As someone who works on financial regulation, his view is education is a better and cheaper solution helping people make more informed choices.
Then Damian Hinds MP who was perhaps the only speaker who had any objections – though again supporting the concept in general. His view was that it wouldn’t work being taught as PSHE as kids don’t take it seriously and while it shouldn’t be on the curriculum he strongly supports it as part of maths – but big picture skills rather than specifics.
He had two main worries, the first that if the subject goes too much into products, by the time the kids are old most of that info will be out of date. He gave examples of endowment mortgages and cheques as things that are now no longer relevant. The second, the fact that he worries that talking too much about debt makes it ubiquitous and may actually encourage people more than prevent.
Andrew Percy intervened to explain that while big picture skills are there, teaching about how current issues work is a great way to learn about the future.
Duncan Hames MP spoke about Further Education colleges and the provision there. He heads up the APPG’s Further Education unit and they are taking evidence for a separate report on the provision there. He discussed how having it in schools would help the provision in colleges. Yet the problem in colleges is that just having it isn’t enough – the broad breadth of the curriculum there makes it a real challenge to get the provision where it works.
Oliver Heald MP spoke about the need for pension education too, though thankfully only for secondary schools. He is a member of the work and pensions select committee and talked about the need to educate people to be able to make choices when auto-enrolment comes and how financial education could help play a crucial role in that.
Simon Hughes MP who is also the higher education tsar talked about the important not just of educating for the medium and long term with debt, gas and electricity type issues, but of the instant need for short term info on apprenticeships, student finance and the immediate options for those aged 16 and above.
I do hope I haven’t missed anyone out (I’m pretty sure I have – so I’m really sorry) or misrepresented anyone. Hopefully when we publish the full Hansard transcript that’ll make up for it. I’d like to thank the MPs for listening and taking seriously the views of the 100,000 people who signed the petition. Fingers crossed this is the start of actually getting this in schools.
Related past blogs
What do I do if my MP is the Speaker?
I was slightly stumped by this question yesterday. I had tweeted asking people to take 2 minutes to write to their MP to encourage them to attend the financial education debate in the Commons this Thursday, on the back of the e-petition hitting 100,000 signatures.
This was one of the first replies I received and it got me thinking. For those who don’t know, the Speaker of the House of Commons is currently John Bercow, who is the presiding officer of the chamber, and a sitting MP. By convention the role is non-partisan and the Speaker never votes or takes sides in any debates.
While of course this is a good idea for the man having to referee our heavily adversarial system – where does it leave constituents? They have a Member of Parliament they can’t lobby or push to engage in politics, effectively disenfranchising them from big political activity. Of course I suspect he still acts as a constituency MP dealing with individual issues, but not political ones.
While I love the history of our Parliament and the long established traditions, this is one of the areas where I think the anachronistic system needs a bit of tweaking. I often wonder what it must be like to live in a sitting PM’s constituency too – does he still do weekly surgeries? Or do you effectively lose a constituency MP?
I’d be interested in your thoughts .
'You can afford to go to uni' – the message is getting through
University applications are down 9% and sadly many students and parents are being scared off 2012 applications due to myths and misunderstandings about the new fees (a few for the right reasons too). So I was delighted to get this email yesterday from John Morgan, who teaches at Conyers School and is an Ascl rep on the Student Finance Taskforce I head up.
Martin, you may be pleased to hear some feedback I received from the parent of a Y11 student (GCSE level, which is two years before you apply for uni) the day after I did a 30 minute summary of the "actual" situation with fees etc. using your top tips.Mr Morgan, I was astonished, ***** doesn’t normally say much about school, but he came home last night and told me that I needn’t worry about the cost of him going to university because he won’t have to pay anything to start with and anyway, Mr Morgan and Martin Lewis say it’s his debt not mine. You could have knocked me down with a feather!
Your tips have made one Mum very happy!"
With only a couple of months left until university applications close, it’s more important than ever to get the message out about the TRUE costs of education under the new system – they’re nowhere near as harsh as many fear – after all, without understanding that, how can people decide if it’s worth it?
The following resources should help:
Dear Mr Cameron, an idea to help you fix people's finances...
Dear Mr Cameron,
If you want more than to just post sticking plasters on people’s finances – to end energy switching fears, protect vulnerable consumers, stop millions being screwed by voracious banks in scandals like PPI, bank charges and endowments, and prevent crisis debts – I’ve an easy and cheap solution for you – compulsory financial education in every school.
And I’m not on my own here. Yesterday, delightfully, the 100,000th person signed my e-petition on your website which means Parliament must now consider a debate on it. To ensure that happens, we’ve joined with MPs like Justin Tomlinson to navigate it through the back bench committee. I hope you’ll help that happen.
We need more than just Westminster hot air
Yet we need more than just the hot air of Westminster. Frankly politicians of all parties need to hang their heads in shame. It’s a national disgrace that for 20 years now we’ve educated our young into debt when they go to university, but never educated them about debt.
The impact of that has hit more than just graduates. It means we’ve eroded the stigma of borrowing. In itself that’s no bad thing, after all, in today’s day and age if you want to get a house or go on to higher education, borrowing is virtually mandatory.
But the shame is we did it without ever considering what’d replace it. Debt isn’t bad, bad debt is bad. We should’ve created a stigma of bad borrowing, instead we’ve tried to make debt flogging lenders ‘responsible’, rather than giving people the tools to be responsible borrowers – knowing how and when it’s appropriate and where to safely get it.
Too many learn the hard way, mired with debts from their first forays into adulthood that drape them in a heavy cloak of financial darkness for years.
The squeeze is on
Now the squeeze is on. It’s hitting many families, and guess what? Your own short term solution is education, albeit by another name. I met you at the energy summit a couple of weeks ago and told you it’d be deemed a failure if prices didn’t come down.
Your big solution…to run a campaign to get people to switch. I’m with you on that, it is the perfect time to switch, but to be fair, people like me have been yelling that for ten years. Do you really think some posters and letters from energy companies will generate a consumer revolution of the scale needed. People are scared, confused and lack trust.
Of course real education isn’t a quick fix, it’ll take years to have a real impact, probably a long time after you hang up your Prime Ministerial boots. Yet what a legacy it’d be. After all, companies spend billions on marketing and teaching their staff to sell – isn’t it time we gave buyers training.
It’s cheap and easy to introduce
Of course to educate the whole population isn’t easy, that’s why the most efficient system to break the cycle of financial illiteracy is to get it in every school’s classroom. Every able child should have a decent understanding of how our highly complex consumer economy works – about borrowing and spending – impulse control and embracing competition.
Banks have seen the opportunity of sending in branded projects – which is clever as many people stick with their first bank for life. But I’d far prefer it if we didn’t send just one in, but five at a time, to teach children to compare them and make companies fight for their business.
The dire need is for education from unbiased teaching sources. Wonderfully some schools already do it, but the majority don’t and this unequal opportunity is not acceptable in today’s dog eat dog economy. Unless it’s compulsory and on the curriculum, head teachers can’t prioritise it. Public support for this is huge, 97% polled agree, yet we still await politicians to deliver.
If you’re worried about the cost, where it’d be put on the timetable and how to minimise the burden on already overstretched teachers, don’t. Content is abundant and an All-Party Group of MPs is about to complete its investigation on how we can deliver this, having taken evidence from campaigners, charities like PFEG, teachers, banks and more. Its report is due soon, as they believe implementing financial education in schools can be done easily, with minimum disruption.
We have one of the world’s most complex consumer economies; don’t you think it’s time our children were taught how to thrive and survive in it? You can make it happen.
Yours sincerely,
Martin Lewis
MoneySavingExpert.com
Stop early redemption penalties on student loans: the MSE consultation feedback
Stop early redemption penalties on student loans: the MSE consultation feedback
The student loan system’s undergoing a radical overhaul that’ll hit new 2012 starters and beyond (not current students). Much has already been decided, such as the new £9,000 fee limit – but there’s still a proposal to levy penalties on those repaying early, which I think is wrong.
Last week we (MoneySavingExpert.com) submitted a consultation paper on the matter. It’s already been decided you should be allowed to repay early, but now it’s all about penalties.
While, I head up the sexily named Independent Taskforce on Student Finance Information for England – and focus on explaining the impact of the changes, not the policy (see Student Loans 2012) – I’ve consistently been against these penalties (see my Seven deadly sins of early repayments blog) and think it’s important to explain them.
The submission is below – edited slightly to fit the blog format…
MoneySavingExpert.com submission on Early Repayment Charges
It is our view that early repayments must be allowed, and as with the current system we fundamentally oppose any early repayment penalties for the following reasons:
It is mis-educating people on how to treat their debts
For 20 years we have educated people into debt when they go to university and are due to take student loans, but never about debt. To now prevent people from repaying their student loan early, where it benefits them, adds insult to injury.
In many ways the problems with the new student finance system are psychological more than practical. Even though many students will be better off not overpaying (see appendix) the psychological damage of banning them from doing so needs to be factored into any decision.
Adding early repayment penalties flies in the face of private sector rules
To penalise overpaying on loans is something we have rightly seen regulation against in the private sector.
Only a few years ago commercial lenders were banned from levying harsh redemption penalties and keeping people locked into loans. This year we’ve seen regulations forcing personal loan providers to allow individuals to overpay their loans if they want to.
For the government to do the opposite on its own loans, in an even more harsh manner, sets a poor precedent.
It’s unpopular and not wanted
We polled MoneySavingExpert.com users on what they thought about the situation. 6,566 took part in poll on the 8 February 2011, which asked:
"Should you be allowed to repay students loans more quickly? The government is currently discussing a ban / extra fees on repaying more quickly as otherwise loans would cost higher earners overpaying relatively less, and wouldn’t meet the test of being progressive."
87%of respondents thought students should be able to pay off their student loans whenever they wanted.
7% said overpayments should be allowed but with early redemption penalties.
6% wanted to ban overpayments so everyone has to repay at the same rate.
Of course there has, so far, been little fuss over this, because other elements of the loan structure have taken the brunt of negative publicity, but this could equally have negative long term financial effects on many students.
It penalises people for good financial management and success
It is easy to see high earners after university as ‘rich folk’. Yet one of the gains and aims of higher education should be social mobility. Not all the successful people after university come from affluent backgrounds.
If repayment penalties are put in place, preventing overpaying penalises people for good financial management and post university success.
For some it’ll mean commercial loans may seem cheaper
The combination of higher interest rates and penalties to repay would actually mean some, who think they’ll earn more, may consider that they will be better off with commercial borrowing, such as 0% credit cards or low interest loans without repayment penalties.
Yet more importantly commercial debt could be cheaper provided the student earns the expected income after university and then has the ability to overpay substantially. If anything goes wrong some will be left locked into high interest debts – which they wouldn’t have needed to repay anyway.
It pressurises parents into stumping up so students don’t need loans
While the responsibility isn’t the parents to repay, but the graduates, many parents still feel it is their job to fund their child through university and prevent them from getting into debt.
Parents need to be cautioned that it’s their child borrowing not them, so they shouldn’t hurt their finances to protect them. Yet in the meantime, changing the system to charge penalties, alongside higher rates, exacerbates the problem.
We will see parents pushed into stumping up for their children’s higher education – some anecdotal tales are already coming in of parents planning to borrow themselves rather than let their child take a student loan. (See the Don’t pay tuition fees upfront guide – ML).
While communication about the system should help prevent this, that is a long term aim. Yet the introduction of early redemption penalties will force people to make this decision even before fully understanding the consequences.
Stop early redemption penalties on student loans
We strongly object to early repayment penalties for all graduates regardless of earnings, however, if they are to be implemented, at the very least the following protective measures must be put into place before the system is launched.
A penalties holiday must be given at the point payments start
Full time undergraduates become eligible to start repaying in the April following graduation. If penalties are introduced we would strongly urge that a short term penalty holiday is allowed at this point.
This is to solve the specific mischief of those who are debating whether to take out tuition fees at all. Currently it is a gamble for the individual (or their parents) as paying upfront is only worthwhile for higher earning graduates, but to know how much that will involve requires a crystal ball.
If there are early repayment penalties, it further forces parents or students to risk paying the loan upfront unnecessarily. Allowing a one-off get out of jail free card to pay the money back allows people to forestall their decision until the point of graduation where future salary is likely to be easier to predict, rather than needing to make an all-or-nothing decision based on very little information before studying.
This measure would allow those who are planning to use savings, or worse take commercial loans, but are unsure about their future, to hold off from paying the loan upfront and wait until they can see the likely benefit of their education more clearly.
Therefore an opportunity at that time to repay some or the entire loan off without penalty would at least provide some respite.
Students must be informed about the cost of an early repayment before doing it
Joint suggestion by the National Union of Students and MoneySavingExpert.com
Whether repayment penalties are introduced or not, it is important students understand the impact of their repayments – as for many it will be a futile gesture. Further explanation as to why is in the ‘most students shouldn’t overpay’ appendix below.
The Student Loans Company, on receipt of an application to repay early, should be mandated to produce a quote on the impact to the student. Based on their current salary it should be signed and returned before the money is credited to the account. The quote should contain two key factors:
For illustration (this is for example only – work needs doing on communicating it):
Based on your current salary of £25,000 and outstanding loan of £35,000…
At 3% inflation with additional earnings growth of 3%, by overpaying £1,000, in today’s value it will reduce your total repayments by £0.
At 3% inflation with additional earnings growth of 6%, by overpaying £1,000, in today’s value it will reduce your total repayments by £0.
At 3% inflation and additional earnings growth of 9% overpaying £1,000, in today’s value it will reduce your total repayments by £1,800.
The overall impact of adding penalties
The changes seem to have been made simply so it can be said the new loans are progressive for the sake of politics to assuage think tank assessments on the system, not the practical impact on graduates nor the educational message it sends.
While lower income graduates may be less inclined to overpay and high earners will not see the penalties as a barrier, it is the middle payers that are the most disadvantaged as they are not getting the chance to catch up.
For years when communicating about student loans we’ve been able to say ‘it’s good debt’ as it’s the lowest long term interest rate possible and repayments match ability to repay. Yet under the new system the higher rate of interest and potential for repayment penalties means it’s simply more difficult for us to say this and mean it.
This in itself will affect access as future students are put off university due to the structure of new loans and this deeply concerns us. While it is something we will continue to work at explaining, the barriers will already be in place unless the overpayment penalty plans are scrapped.
Appendix: Most students should not be repaying early
The simple fact is that, under the new system most students should not be repaying early.
We believe they should have the choice to do so if they wish, but that there should be no detrimental effect or additional cost.
As it stands, there are too many variances for each student to know what will happen in their future in order to determine the actual cost of their education, but as we will show below most will gain by not repaying and this must be made clear to anyone potentially wanting to do so.
Why most people shouldn’t pay off early
Early repayments are a bad financial move for many students. Repayments are based on earnings (9% of everything earned above £21,000) and all remaining debts are wiped after thirty years.
This means there are many who will never repay in full and may find themselves clearing a debt that they would never have needed to repay.
A graduate on a typical starting salary (£25,000) which rises at 2% above inflation for 30 years, who has taken the full £9,000 tuition fee and away from home (non London) maintenance loan of £5,500 would have accrued total borrowing of around £43,500.
According to www.studentfinancecalc.com their real term repayment over the 30 years before the debt is written off would be £24,940 – far less than their original borrowing. So in the vast majority of circumstances any overpayments made wouldn’t reduce the amount paid back – therefore it’s a waste of money.
The only people who stand to gain from early repayments are therefore those on higher incomes.
Many people wrongly pay off early
While the clinical financial logic above shows people shouldn’t try to overpay – they do. Under the current system the average median salary of people who overpay is just £18,400.
While this is likely to be pushed up under the new system, it still means many who pay early will already be financially penalising themselves, to add to that with penalties is a mistake.
"If no-one will fully repay £9,000 student tuition fees – how is the system sustainable?"
It’s all because people will borrow more but repay less each month
Under the changes to student finance in England that hit new starters in 2012 (see the full Student Finance 2012 – facts not myths guide) there are four key facts that radically effect the amount people will repay compared to the current system…
This is the ONLY fact that affects monthly repayments – earn more and you repay more – earn less and you repay less (or as someone recently said to me…"no win, no fee").
Combine the bigger borrowing and higher interest with the fact that you repay less each month, and the 30 year limit and you can see why many people won’t repay in full.
There’s no better way than spending two minutes playing with the calculator to see this, just look at how few scenarios there are when people pay off their loan in less than 30 years (which is what indicates it’s fully cleared).
If people won’t repay how does it add up?
With all that added together, it’s no surprise what I’ve been emailed/Facebooked/Tweeted by many people, saying something like:
@MartinSLewis So either a) the Government has a massive deficit or b) we’re going to take money from universities that they’ve already spent"
And I understand where this conclusion comes from. If so little of the money being loaned out will be repaid – surely the system has a real problem.
The bit people are forgetting
For ease of numbers and explanation, let’s say the cost of educating each student at a university is £8,000 per year.
It receives £3,000ish tuition fees from the Government (Student Loans Company) repayable by graduates in later years.
It receives £5,000 from the Government (called the teaching grant).
So currently, less than a half of the money the Government gives to universities for teaching (research is different) is repayable to it. Under the new system the majority will be repayable.
Nerdy interlude – feel free to ignore! The numbers above are massively oversimplified. The average cost of a course is less than £8,000. The amount it costs per student varies hugely per course. The teaching grant isn’t being entirely phased out in all subjects. The average tuition fee in 2012 will be higher than £8,000 but some of that money will go to bursaries and grants. So don’t use these numbers as gospel, they’re just used to keep my explanation of the concept easy to understand – not as a pure assessment of the actual change.
Now, take this logic on a step further by plugging some (made up approximate) numbers in to show the impact.
If currently 70% of the tuition loan is fully repaid and we say it drops hugely to only 50%, then of the £8,000 given to universities under the current system about £2,100 is repaid, but under the new system nearly double that, £4,000 is repaid.
So even with a lower repayment amount, the new system is still beneficial to the Treasury. And this ignores the fact that the interest rate is higher under the new system, which means the Government will recoup even more.
This isn’t an argument for the new system
Please don’t read this as a defence of the new system. My point is that those jumping to the conclusion it isn’t sustainable on the back of the calculator are missing a very big element of the business logic behind this. In fact, the Government’s budget on higher education will be drastically reduced by the changes.
Yet that neither means the system will work well, nor that it’s fair. If nothing else, it shows that the loan book will be huge – and the amount of cash the Government will have to pump out each year will also be huge – and it’ll take much longer to recoup – these alone could mean it may need limit the number of students. However, these are subjects for another day.
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Students – lower earners deferring to 2012 could pay LESS
A’level results are out this week and usually many students consider fun gap years, or the option of postponing a year to get into the uni of their choice. Yet this year, for some this option’s filled with fear as that means they’ll face the new 2012 system in England with up to £9,000 annual tuition fees.
But while the headline fee difference is huge, the cost difference is not as stark, for everyone, as many believe due to the change in repayment structure. The following quick reference table has been prepared as part of the Independent Taskforce on Student Finance Info (which I head up) to show the difference.
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At a glance comparison 2011 full time uni starters v 2012 |
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2011 starters |
2012 starters |
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Typical Tuition Fees |
£3,375/year |
£6,000-£9,000/year |
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Max 1st year living loan (1) |
£4,950/year |
£5,500/year |
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Max 1st year living grant (2) |
£2,906/year |
£3,250/year |
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Repayment threshold (repay 9% of everything above this) |
£17,500 (3) |
£21,000 (4) |
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Annual repayment for year starting April after graduation |
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£15,000 salary |
None |
None |
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£21,000 salary |
£315 /year |
None |
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£25,000 salary |
£675 /year |
£360 /year |
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£30,000 salary |
£1,125 /year |
£810 /year |
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£40,000 salary |
£2,025 /year |
£1,710 /year |
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Notes (1) Outside London away from home. (2) Given to those with family incomes up to £25,000 (partial grants given to those with family incomes up to £42,600). (3) Repayments are set at £15,000 for current graduates but rise annually with the prior March’s RPI inflation rate every April starting 2012. We already know the first year’s is 5.3% after that we have assumed 3.5% inflation. (4) Rises with average earnings from 2017. |
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So what does this mean in practice for deferring students?
Those who start in 2011 stay on the current lower fee regime throughout their student life, so certainly the overall money you’re eligible to pay is larger for 2012 starters – however the real question is how much of it will you actually need to repay?
Of course, with bigger fees, higher interest rates (currently its RPI (inflation), under the new system it can be as high as RPI + up to 3%) and lower repayments for those who earn higher salaries in the years after university, 2012 students will certainly end up paying very substantially more in total.
Yet while 2012 starters have much higher fees and higher interest rates, they only have to repay if they earn over £21,000 – much higher than is likely for 2011 starters.
This means those above the repayment threshold in 2012 will likely have over £300 a year more disposable income than 2011 starters. And those who don’t gain financially from their university education and have low salaries may end up paying less in total (within the 30 years before the debt wipes) because of the higher threshold.
(If you wondering why I used this fact as the title its because everyone assumes it’ll be worse, so I thought it more important to highlight when people’s assumptions are wrong.)
For full info on how this works read the Student finance 2012 guide which will take you through it.
A nerdy extra bit – why does it say that 2011 starters repay at £17,500 not £15,000?
Current graduates start repaying their student loans when their earn above £15,000. Yet from 2012 until 2015, this threshold is increases with RPI inflation every April, based on the rate from the prior March.
We know March 2011′s RPI rate was 5.3% so that will be the change in April 2012, yet that still leaves three year’s worth of inflation to be factored in by 2015 – which is when most 2011 leavers will start to repay.
Predicting inflation is notoriously tricky – so for the sake of illustration I’ve plumped for an average 3.5% over these years – roughly in-line with treasury forecasts.
If inflation is lower, then 2011 starters’ repayments will need to be higher, if inflation is higher their repayments will be lower. It would take a 10% average RPI increase in the three that we don’t know yet for the two repayment levels on leaving to be on parity for the two systems.
From 2017 the threshold for 2012 starters (ie, £21,000) starts to rise with average earnings, though at that point there is still no decision as to what happens to the threshold for 2011 starters.
Martin Lewis opening the Rock Assembley at the O2 Arena
Having expected 13-18 year olds, as I got to the Arena it turned out they were actually 11-16 year olds with many at the younger end of the age group – adding to the pressure, as university funding issues are a long way off for them.
But, at that point I thought what the hell, it’s better to run the very real risk of me dying on my arse, for the chance of getting crucial messages across. And actually, that nihilistic state of mind made it all a lot easier. Especially when virtually everyone I met from the Rock Assembly crew kept telling me how ‘brave’ what I was doing was.
The X Factor trick up my sleeve
Having known this would be tricky (thanks for all your top suggestions), we’d arranged a surprise bit of help. The X-Factor voice over artist, Peter Dickson, came along to do my intro (in X Factor style, playing the ‘celeb hype’ card to try and boost the attention rates) and then bring in each key point for me to explain.
Nothing quite prepares you for hitting the stage with that many people. The excitement was as thick as treacle and the noise like a wall.
I think they were just desperate for the show to get on the road – so I played an easy card first and asked whether they were looking forward to Tinchy SHRIEK, Diversity SHRIEK and Chipmunk SHRIEK - the decibels were louder than Laurence Llewelyn-Bowen’s dress sense.
Then I tried to take that momentum and shift it to: "Now shout out even louder if you want to go to University" – thankfully the shrieks continued.
We can’t let kids be scared of bettering themselves
Many schools invited to attend this charity concert have a large percentage of pupils on free school meals, as they’re from lower income families. So I went straight in, while I knew they were listening, with the meat of the message and said something like:
I’m here to tell you one thing. Whatever you have heard, there is no-one in this room, who if they get the grades and work hard, should be scared they can’t go to university because they don’t have the money. If you want to go, you can."
Hearing them cheer for this really made my day!
The boos were good news too
Tinchy Stryder
But, when I went on to the fact that once you graduate, if you earn, and remember most people who go to University earn on average £100,000 more than others, CHEER, you will need to repay it, and there was an almighty BOO!
Frankly, it threw me for a second. Yet my role as head of the Independent Taskforce on Student Finance isn’t to sell the system, it’s to explain it – so I suddenly thought hell, as long as they get the message, even if they don’t like it, I’m doing it right.
It soon played out that it was all part of the grammar of this type of event. It’s about a vocal, good natured response that demonstrates they are engaged with what is being said (interestingly when I said the phrase ‘the Government’ there was a large boo too).
And that’s the way it went, from then on they played ‘judges’ to each of the key messages on the screen…
The boo was especially loud when I explained that many of their generation would repay much more than current students.
At this point I changed the tone and took the volume down to get some silence. I explained that while they will hear lots of diverse views on the news arguing the goods and the bads of the system – that’s about the bigger picture – of the future of the whole structure.
What they need to focus on, is that if they want to go to university and if they’re bright enough – they don’t need to have the cash and they will only repay if they earn enough once they leave.
That was it, my five minutes were up and I was off (originally I’d also planned to include "£6,000 OR £9,000 – IT’S THE SAME EACH MONTH" and "YOU GET LIVING LOANS OF UP TO £7,675", but when I realised the age group I cut these as it was too much info).
Hadouken!
Overall I hope the message got across
It’s very difficult to judge how it went with so much noise and all those faces staring back at you. It got the adrenalin pumping through the system (I can hardly remember a word that I actually said). As I came off the guys from Hadouken! who were about to go on, were really kind saying how well it went.
I think I managed to hold their attention through it and get the message across. It’s especially important for social mobility that children from lower income backgrounds aren’t disenfranchised by thinking "I’ll never be able to go to uni", which can easily spiral into defeating all aspirations too early.
They need to understand that whatever their family finances, if they want to go to university it is attainable for them (lower income families actually get much more support see student loans 2012 for more info).
PS. It was filmed, so if I can get the footage, I’ll put it on here.
How do I explain student finance to 16,000 kids at a rock concert?
It’s brown trouser time. Next week I’ll be speaking to a crowd of 16,000 at the O2 arena about student finance, right before acts such as Diversity, Tinchy Stryder and Chipmunk perform. Yet frankly I’m panicked over the best way to get this important message across.
It’s all part of the Transformation Trust’s big rock concert. The Trust is a charity that helps fund extracurricular activities to help kids across the country and this is its big, annual centrepiece free concert. I’ve been asked to speak in my capacity as head of the Independent Taskforce on Student Finance Information.
They’ve given me an incredible slot – 10 minutes at the start, to tell the 13-17 year olds there about Student Finance 2012 – the facts. But, this does leave me with more than a slight worry that I’ll go on stage to deafening screams of: "We want Tinchy" and not a word I say will be heard, as a bunch of bored teens yell at me to get off the stage (they’re not my usual audience after all!)
I’ve been brainstorming how we can try and get the facts across without appearing the boring old fuddy duddy getting in the way of their fun. The content is easy but the key is the presentation and treatment of it all. My favourite idea was coming on saying: "I’ve been told I’m not cool enough to talk to the youth" then bringing on a comedian to do some type of silly ‘street translation’ – but we don’t have time to put that together.
At the moment I’m thinking of using sirens, big graphics, warnings and more to make it all feel big and just going through the key bullet points. Yet any creative easy to do ideas would be more than warmly received.
New Money Mantra for 13-year-olds
From Euan Smith:
@MartinSLewis I used lesson ideas with Yr8 PHSE money management today. They created 2 more mantras "Are you allowed it?" "Is it useful?"
I love it. So these are the new 13-year-old Money Mantras:
If you’re skint:
Is it useful?
Can you afford it?
Is it allowed?
Have you checked if its available cheaper anywhere else?
And for those who aren’t skint:
Will you use it?
Is it worth it?
Is it allowed?
Have you checked if its available cheaper anywhere else?
If the answer to any is no – don’t buy it.
Related past blogs
PS. I’ve just realised this is my thousandth blog – hoorah!
MSE to donate £35,000 to the campaign for financial education in schools – a political donation
For transparency, as it’s the site’s first ever ‘political’, as opposed to standard charity donation (see charity fund) I thought this was important to blog about. The site and I have been championing compulsory financial education in schools for a long time and now we’re in a practical position to do something to help – we’re putting our money where our mouth is.
Earlier this year, I was delighted to be involved in helping put together, launch and become co-sponsor of the first ever All Party Parliamentary Group of MPs to support this campaign (see more on the financial education APPG) and, due to MoneySavers’ help in writing to their representatives we managed to secure over 200 MPs joining, by far the biggest APPG of its kind on any subject.
With that huge weight behind it, the APPG MPs are now launching a committee process, akin to a select committee to interview key players, take evidence, investigate issues and provide a report to the Government on what’s needed and how feasible it is. As an APPG does not have official parliamentary standing, it has no funding and relies on external support – and it’s this that we’re donating to – to help contribute towards providing committee support, report writing facilities and transcripts.
Just to be clear, this is NOT a donation to any one party, the APPG has members of all parties. Technically, we’re actually giving the money to the charity PFEG (the Personal Financial Education Group) that provides the secretariat for the group – though the cash is ring fenced so it can only be used on supporting the APPG’s work.
We know from past polls that 97% of you support this move and I hope this donation will help bring financial education in schools a little closer.
Related past blogs
Don't believe everything you read in The Times about me and student loans
I have a sneaking feeling the headline was written before the story (you can see it here, although The Times has a paywall).
I was called yesterday by The Times and asked something like the following:
Q. "Is it true you’re helping the Government sell tuition fees?"
My answer was: "I am no fan of the new system and certainly won’t be helping anyone sell anything. Yet, I have had a meeting with the Government about financial education and I am worried about the fundamental misunderstandings many people have about tuition fees.
"For years I’ve said we’re a nation that educates its youth into debt, but never about debt and now I’ve got the chance I am talking to the Government about how to do this, as part of the campaign for financial education. The aim is to ensure people understand the real costs – there are so many misunderstandings it is wrongly scaring many off (and in some cases not scaring off some who perhaps shouldn’t go)."
Q. "Did you come up with the phrase it’ll cost two pints and a bag of crisps?"
My answer: "I’ve never heard of that phrase, it’s not how I would communicate it and it’s nothing to do with me."
Now, go back and read their headline and tell me where they got it from.
Most of the actual piece is pretty close, yet the headline will colour how people read it – and it’s so far off base. The real key is all the quotes are accurate and right near the end of the article it does actually state my position:
"I am no fan of the new system … but my great fear is that the political debate has muddied the waters so much that there is a fundamental misunderstanding of how the system works and this will cause as much damage to access as the tuition fees themselves."
Related past blogs
Student Finance 2012 changes – it's time to tackle the ignorance
Update Note 13 June 2011: Now see the new Student Finance 2012 the facts guide (direct link www.studentfinance2012.com
I had a good meeting yesterday with David Willetts (Minister for Universities and Skills) and Simon Hughes MP (Advocate for Access to Education). While I’m not the greatest fan of the 2012 changes, I do believe a chunk of the widespread fear is based on a lack of understanding, rather than the facts. Therefore, it’s crucial that we ensure people really do understand the good and the bad effects of the changes.
So, I’ve taken a decision to accept these changes are going to happen (though I will still lobby on the areas that aren’t fixed e.g. early repayment penalties) and leave the wrangling for others – while I get on with starting to explain how the new system works.
When we recently launched the All Party Parliamentary Group on Financial Education, amongst the other challenges I put to the 100+ MPs there, one was to ensure, "no students go to university under the new system, without understanding how the borrowing works" (watch the Financial ed. challenge to MPs video).
Yesterday’s meeting was to discuss options on exactly how to do that. Simon Hughes has been working on the wider picture of access for a while, and I’m pleased to say the Government are very receptive to the plans.
Major change needs major communication
The last time there was a sea-change in the way student finance worked was in 1998. Then two things happened – tuition fees were brought in and the loans changed from the old ‘mortgage style’ to the new ‘income contingent system’.
The media then concentrated on the contentious tuition fee issue as it was the better story – little was said about the change of loan repayments, which meant that rather than needing to repay the whole loan over 60 months once you hit a threshold, you simply repay 9% of everything you earn above £15,000 each year through the tax system – a much more gradual and less harsh system.
Yet now we’re back in the same boat. We have a host of changes and of course yet again, the focus is all on the rise of the cost of tuition fees and the other changes, some good and some bad, have primarily all been ignored (see my old Student loan argument is dangerous blog).
But, most people haven’t got a clue of either and there’s widespread myths and ignorance (e.g. see Will new student loans stop you getting a mortgage? blog) and while I’m at it let me clarify the answer to the most common question I get asked on this subject – it will ONLY affect those starting university in 2012 and beyond, if you are already a student by that time, you will continue on the current system (see the Student Finance guide for more).
We need to change the language
I’m in the middle of writing a new top 10 things everyone needs to know about the changes guide, so I’m not going to go overboard on explaining the new system here in a hastily written blog.
Yet, there is a big confusion between the size of the fees and loans and the actual cost of education. For example it is possible to get £9,000 tuition fees and yet have absolutely no cost because you never earn over the threshold to begin paying off your loan.
The whole system of student loans simply doesn’t fit into other lending or financial categories, it needs its own new language to deal with it to make sure it’s clearly understood.
What is needed is for students and their parents to understand the cost of the system and its impact – not just the level of fees – for that we need tools, effective communication and more. Only then can they truly decide whether it’s worth it.
At yesterday’s meeting I’m pleased to say there seemed to be a commitment to ensuring this will happen.
Related Past Blogs
>Universities must educate students over the new loans
>Student loans the seven deadly sins of early repayments
> Argument over student loans could kill the next generation of students
Is it time to teach uncertainty in schools?
Sometimes there just isn’t a right answer, or at least not without a crystal ball. This simple fact is one many people struggle to grasp. My focus is financial, but this impacts all elements of life including relationships, work and health. The Government is looking to try and boost our happiness, perhaps ensuring the understanding of uncertainty would contribute to that.
It seems to me that society focuses too much on right and wrong, solving problems and definitive’s. Teachers in schools, do you ever teach, ‘there’s no right answer’?
It’s a common problem in my game. I’m often stopped by people asking such questions (as happened yesterday, which prompted this blog).
"Will fixing my mortgage for five years be the cheapest deal?".
"Are house prices in my area going to rise?".
or "Should I sell my shares?" (even though I don’t cover investments).
When I explain that these questions rely on unpredictable factors that no one truly knows and all you can do is examine the risks – I’m often given a shirty look. They seem a little perturbed, as if I’m hiding from them a hidden truth I must know. I sometimes think they’d prefer to think I’m just not telling them, rather than that I just don’t know.
Would you borrow money for a new car if you couldn’t get a job without it?
So, perhaps it’s time we tackled this issue. Regular blog readers will know I’ve been campaigning to get financial education in schools for a long time.
As part of this, we have our free Teen Cash Class guide to help parents and kids get a grasp on financial realities. Within it there is a ‘good debt, bad debt’ test with a series of questions and I often talk about it when making speeches to adults – but there’s one element of the test that always stumps people.
After a few black and white examples of when you should or shouldn’t borrow – leading to a jovial attitude as everyone follows my request to shout out "good debt" or "bad debt" on cue – I throw the following in…
I work in a big city, but lost my job a few months ago. The only job I’ve been able to find is in the countryside – I’ve managed to find somewhere affordable to live – but my kids school is six miles in one direction and my work is seven miles in the other and there’s no public transport.
"I’ve never had a car, but I have checked and the cheapest one I can afford that’ll be reliable is £1,500. Yet I’ve no savings left and after being unemployed my credit score is poor, so I can only get it at 20% APR. That’ll push me right to the brink, but without it I can’t get the job."
At this point I reiterate, "If I get the car and I don’t pass my probation at work, it’s a nightmare. Yet if I don’t get the car, I can’t get the job."
When I ask if it’s good debt or bad debt, I’m usually met with a stony silence – gone are the easy cat calls of the answer. So, I ask everyone to put their hands up for either good debt or bad debt and the room is usually split down the middle.
Occasionally there are a few smart-alecs out there trying to find a way round this deliberately constructed, hypothetical question, leading me to reply, "the kids are too young to cycle and I’ve got a dodgy leg"
My answer is that it’s grey debt – without a crystal ball it’s impossible to answer. In fact, this is less of a question about risk and far more about learning to evaluate a situation. Do a risk-benefit analysis and think about the key decision making criteria.
What’s taught in schools?
For me this is a key lesson we all need to learn in life, so I think it’s important to ensure we’re all prepared to understand that there are circumstances when you can’t always get it right.
My own education was a long time ago, and I’m not sure if Dr. Allday’s class on Heisenberg’s Uncertainty Principle, where using us as guinea pigs to see if quantum mechanics was suitable as an option for A Level students, really counts. But I’d love to know from teachers where this type of grey answer thinking is taught in schools. I hope that with a more progressive curriculum and with PSHE these days there is more of it, but I just don’t know.
It’s important for everyone to understand that sometimes we get a bad outcome having made the right decision, and life can be tough on the back of it, yet we shouldn’t berate ourselves for it afterwards if there was no way of doing better.
I’ve met psychologists who tell me one common reason people are in therapy is because they’re looking for certainty where there can never be any – maybe we all need to learn is that sometimes it’s just not available.
I’d love your thoughts on this, as well as some other examples of similar uncertain financial decisions you’ve needed to make.
Financial education MP named 'MP of the month'
It’s great to see the campaign to get financial education in schools getting recognition within political circles. Congratulations to Justin Tomlinson MP for being named ‘MP of the month for May’ by Total Politics magazine, one of the main in-house political journals read by politicians.
This is a crucial step, both as an indication that there is real momentum gathering behind the financial education campaign, but also and probably more importantly it shows that this is now becoming an open subject of discussion among the Westminster village.
For years, banks, consumer groups, teachers, youth clubs and others have been providing great content and resources to help the cause. This has been a fantastic achievement, yet an impasse has been reached where if we want every child to be taught these crucial skills we can’t just rely on the wonderful teachers or head teachers who take an interest. We need it to become compulsory so that no child misses out as the majority still don’t get taught anything.
That’s why this issue is very much a political one – as only politicians can make it happen. The worry is Westminster often operates within its own slightly disjointed bubble. The All Party Parliamentary Group that Justin set up with the support of MoneySavingExpert.com and PFEG is a crucial line into that world for those of us who’ve been campaigning, as there is a growing acceptance that it will only really be won in that world.
Interestingly, that perspective is almost directly mirrored by the editor of Total Politics magazine in the choice of May MP of the month but from the other side, as Justin’s main achievement is seen as being bringing in outside bodies into the village.
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