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Last Updated: Friday, 5 August, 2005, 23:49 GMT 00:49 UK
What university is going to cost
By Mike Baker
BBC News education correspondent

Mike Baker graphic
If you are a student or the parent of a student starting university next month, are you congratulating yourself on just escaping the new variable fees that come in from next year in England?

If so, you could be wrong.

Initially it looks like a no-brainer: start university this autumn and you pay fees of 1,175 a year for the rest of your course.

Begin a full-time course in September 2006 and the great majority of universities will be charging 3,000 a year.

Over a three-year course that is the difference between 3,525 and 9,000. In other words, that amounts to an extra 5,475 to be paid.

For a four-year course the price difference rises to 7,300.

Debt aversion

As a parent with one daughter starting university in September and another who may start after 2006, I am certainly interested in the financial difference between the old and the new systems.

The biggest winners are parents
The government is also very interested in explaining the difference. It fears that debt-averse students could mean a fall in demand next year, wrecking hopes of meeting the target of getting 50% of young people into university by 2010.

Vice-chancellors too are worried that higher fees could prompt more people to take non-traditional routes.

Indeed, this week the Open University reported a steady increase in school-leavers opting to take their degrees via the cheaper, distance-learning route. One in five of its new undergraduates is now aged 24 or under.

Yet the financial burden of the new fees system is not necessarily bad news for everyone. The problem is that it is very complex, with both winners and losers.

The biggest winners are parents. Since no fees are paid up front they can, justifiably, argue that the entire fee burden is removed from their shoulders and transferred to their offspring who only pay when they become working adults.

Language and perception

The system is certainly counter-intuitive. Because there has been so much publicity about the higher fees, people often forget that in future nothing will be paid up front.

This is worth repeating.

Whereas now students pay, in effect, an entrance fee of 1,175 a year, from 2006 they will pay no fees until they have graduated and started to earn at least 15,000 a year.

In Scotland, the politicians have reaped the benefit of being able to claim they have abolished fees.

Yet, in fact, they have merely done something very similar to what is happening in England: they have replaced an up-front fee with an "endowment" to be paid after graduation. Language is vital in determining perception.

In England, from 2006, the fees will actually be paid to the university by the government. The government will then present the student with the bill to be paid after graduation through the student loans system.

This bill, plus whatever amount the student has borrowed to cover living costs, is then combined to make up the total student loan.

Unlike commercial debt, the graduate cannot end up paying back more, in real terms, than they borrowed. That is because the rate of interest is set at the rate of inflation (currently about 3%).

Graduates pay back the amount they borrowed at a rate of 9% of their income above the threshold of 15,000.

So a graduate earning 18,000 a year will pay back their student debt at 9% of 3,000. That is 5.20 a week.

Grants are back

Yes - as one newspaper got rather excited about this week - it could take the average student 15 years to repay.

If you are from a relatively poor home you will probably be better off under the new system
But it is the level of debt, the amount of interest, and the rate of repayment that counts, not how long it takes to repay.

Did this newspaper want the government to double the payment rate just to halve the time it will take to repay the loan? I suspect not.

Of course, there is an argument to be had over whether or not university should be free.

Yet that should not cloud an analysis of how the post-2006 system compares with the old one.

For example, if you are from a relatively poor home you will probably be better off under the new system because of the reintroduction of grants.

The full grant plus the minimum university bursary amounts to 3,000 a year, exactly the same as the maximum fee.

About half of all students will receive either a full or partial grant.

Low income

For example, a student from a family earning 17,500 or less will get a grant of 2,700 a year from the government.

Typically they will also receive a bursary from their university of 1,000 a year and will be eligible for an official student loan of 3,200 a year.

That is a total income of 6,900 a year (students in London will get more).

That is far more than students receive at present so they should not need to take out any expensive commercial debt, such as credit cards, to get by.

Let's say that a typical student in these circumstances would need only to take out 1,500 a year in loan, giving them 5,200 a year to live on, not counting anything they may earn from casual work.

They would then graduate with a total student loan debt of 13,500, made up of 9,000 for fees and 4,500 for living costs.

This is similar to the overall debt of many students today but the great advantage would be that this would all be student loan debt not commercial debt.

So, if they go on to a very lowly paid career, or do not work at all, they will never have to pay back a penny.

On the other hand if, thanks to their degree, they earn a large salary, they should be able to afford to pay it back.

Grant 2,700 - -
Bursary 1,000 - -
Loan 3,200 4,400 3,300
Total 6,900 4,400 3,300

Middle income

At the middle of the scale, a student from a family with an income of 37,500+ a year will get no grant and will probably not receive a bursary from their university.

However they will pay no up-front fees, saving 3,525 over three years compared to now.

No parent lies awake at night worrying about the future tax liability of their children
Dr Nick Barr
They can take out the full student loan of up to 4,400 each year. That is 210 more than the current maximum loan.

This means (assuming no parental help) they will have a lower income than the poorest students but should still be less reliant than now on commercial debt because they will not have to pay fees while at university.

If they take out the full student loan, they will graduate after three years with a loan of 13,200 plus the 9,000 they will owe for their deferred fees.

A student loan of more than 22,000 is certainly a large debt. Again, though, they will only have to start repaying this when they earn over 15,000.

If, for example, they earn 20,000 a year the repayments would be 450 a year or 8.65 a week.

In this respect it is much more manageable than commercial debt: if your income falls, you pay back less. After 25 years, if you have not paid it all off, the slate is wiped clean.

Is this the sort of scenario to cause parents to worry?

As Dr Nick Barr, a pioneer of income-contingent student finance schemes, has put it: "No parent lies awake at night worrying about the future tax liability of their children."

He is, of course, right to point out the fear is based on the concept of commercial debt when the reality is that, in repayment terms, this scheme is much more like a tax.

High income

Finally, at the top end of the scale, students with families earning over 50,000 a year will almost certainly be worse off under the new system.

They will get no grant or university bursary. They will only be eligible for 75% of the student loan, worth about 3,300 a year.

Government ministers have always been nervous of spelling this out for fear of sounding like socialists
They will therefore need parental help, their own earned income, or a commercial loan to meet the full living costs of university.

And, of course, they will have to pay 9,000 in fees after graduation, compared to the current pay-as-you-go fees of 3,450 over three years.

In short, the post-2006 system generally looks a better bet for students from low-income homes, perhaps marginally more expensive for those from the middle-income bracket, but much more expensive for those from higher income families.

Robin Hood

So it is somewhat ironic that the greatest concern over the new fees system has been on behalf of students from the poorest homes.

This is a Robin Hood-style, redistributive scheme: taking from the better-off graduate in order to give to the student from a poor home.

Government ministers have always been nervous of spelling this out for fear of sounding like socialists.

Yet, this obfuscation, like the terminology of "variable fees" rather than "graduate taxes", could threaten the success of the scheme if it deters the very people it is meant to help.

The government has a big explaining job to do.

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OU sees rise in younger students
02 Aug 05 |  Education

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