Pyramid Comment

This journal takes an alternative view on current affairs and other subjects. The approach is likely to be contentious and is arguably speculative. The content of any article is also a reminder of the status of those affairs at that date. All comments have been disabled. Any and all unsolicited or unauthorised links are absolutely disavowed.

Wednesday, December 22, 2010

Student Loans: Repayment Analysis

It's sincerely hoped that the argument

presented below

is found to be seriously flawed - DA

A rough appraisal of the figures regarding student fees and loans very quickly demonstrates how the 'student' is being railroaded into funding the alleged deficit. The deficit that is conveniently and constantly paraded as the inheritance from the former government: 'the deficit inherited from the last government'. Allegedly there is a global recession, but it rings a very hollow tone when very good reasons apply to create a recession. Money gets redistributed and... just disappears and is replaced by $£trillions through quantitative easing. The effect that's important is unofficial devaluation. The plan continues to take shape and solidifies into reality: the money roundabout based on an Interest Merry-Go-Round.

Create the problem: (alleged) deficit

Provide the solution:
cuts, cuts, cuts
debts, debts, debts
interest, interest, interest

The repeated 'bonus' of raising the level when repayment becomes mandatory (currently only when employed) to £21,000 (from £15,000) is complete misdirection. Not magical, just crude illusion. Crude maybe, but effective. It 'sounds' beneficial to the student, but government never shows such behaviour and this time is no different. The level of interest 'earned' by the government escalates hugely and is an example of the U-turn 'in a heartbeat' ethic: 1.5% can quickly be converted into a higher figure that can never be predicted. It is totally at the whim of government, but it's most likely to be...


  • The situation regarding any interest applied to an unserviced (dormant) debt remains unexplained. The implication is that the debt is placed in a state of hibernation, but does not explicitly state that interest in NOT applied on loans below the threshold. The loan is 'theoretically' active from day one of the first year (Y1) after installment of one-third over three years or one-quarter over four years. This implies the addition of interest 'up-front' from the outset.
  • Even a 90-day deferment does not explicitly answer the question of whether or not interest applies from Day 1 of Y1:
    • The tuition fee loan is a non-financially assessed loan to meet the cost of tuition fees. It is payable to the HE provider if the student is in attendance on the 90th day after the academic year start.
 What's owed from between

Day 1 and Day 89?

As an illustration, assume a new graduate has 'created' a debt of £9000 x 3 years = £27,000.
    • Student Loans Company will apply a 1.5% interest rate from 1 September 2010 across the UK. Between 1 September 2010 and 31 August 2011 (academic year), the interest rate may change because it is linked to the rates charged by high street banks (panic). The rate will be the lower of the Retail Price Index (RPI) in March 2010, or 1% above the highest base rate of an [undeclared, but] nominated group of banks. [How vague and obtuse can it get? DA]. The maximum rate of interest that may be charged between 1 September 2010 and 31 August 2011 is 4.4%; this was the RPI in March 2010. This level (4.4%) of interest adds an enormous overhead to debt.
    • So, it could be anything between 1.5% and 4.4%. Today. When a mortgagee undertakes a loan on a property, this is only applicable until rates go up. At any time and for any reason, however specious:
    Sometimes down (small), but mostly up (large)
    • Any tax advantages the higher paid (mostly from the 'elite' classes? - DA) receive to offset interest is unknown
    Taking the lowest repayment band, this means that anyone earning £21,000 will have to repay 9% of the amount above the threshold. Or nothing: 9% of (£21,000 - £21,000) = £0 and 9% of nothing is... nothing. Although repayment is triggered, nothing is collected and the debt remains at £21,000 after the first month. This still stands at £21,000 after a second or third or... month.

    The interest clock is, however, merrily

    (and silently)

    ticking away in the background

    The following discussion is made entirely in a vacuum and may be entirely wrong, but since little or no useful information (the Devil is in the Details) is provided should be regarded with that in mind.

    The idiom "the devil is in the details" 
    refers to a catch or mysterious
    element hidden in the details

    It’s based on logic and expectation of government and is displayed here for consideration only and should not be assumed to be accurate. The figures actually calculated are correct, but the reasoning to arrive at them may be faulty. The lack of information makes this inevitable and that paucity of information is very disturbing. Especially when an untrustworthy and duplicitous government is involved and Lord Browne by his recommendations (£15,000 -> £21,000) presumably sympathises with the coalition government.

    Someone must pay the ‘up front’ tuition fees. The university will want course payment at the commencement of the year. Simple budgeting demands this and running a university needs financing. University 'borrowing' doesn't involve tuition. Universities are not in the business of providing education for nothing. They will want their fees ‘up front’. When someone books a holiday it is paid for before the holiday takes place, not afterwards. Any financial contract may be with a credit card company or bank, but never the holiday provider unless full payment has been made directly and in cash. Enabling a holiday will form one contract (with the consumer) to provide the holiday (once it’s been paid for) and another possibly with a finance company. This defines consumer borrowing. A source of growth.

    Interest has initially been set at 1.5% (variable and at the whim of government, but usually only goes upwards) for the academic year 2010-2011. This should remain applicable for that entire year. Students and graduates who already 'enjoy' a debt do not have it fixed and suffer at government whim when the interest rate increases (and decreases, of course - DA). The interest rate for the next academic year will not be declared for many months, possibly not until August 2011, but will (almost certainly – DA) be more than the current 1.5%. Any existing ‘loans’ (debt) have been caught in the trap. Since Day 1 of Year 1 (Y1). Amortisation involves additional interest since every month interest is added to interest already charged. The yield is compounded.

    For the sake of illustration (errors may be detected and the logic may even be flawed, but the principle illustrated is sound), figures are simply 1/12th of the annual total, so £9,000/12 = £750. Earnings are non-existent and no repayment is made (the detail). Unless, of course, an explicit payment is forwarded before graduation. This defines a most unlikely scenario. The expectation is that repayment becomes due only after Y3 is complete and after graduation has taken place. And when earnings of £21,000 trigger the system. But the interest clock (elephant in the room) starts ticking at Day 1 of Y1: debt = £9,000 (£750 x 12).

    • M1 -> M12 (Y1)
    • M13 -> M24 (Y2)
    • M25 -> M36 (Y3)
    • M37 -> M48 (Y4)
    • M49 -> M60 (Y5)
    Interest is calculated at 1.5% and amortisation is 0.0225% (1.5% x 1.5%)

    Amortisation may seem small, but even at £0.16 could easily exceed what is believed to be the effective reduction (£0.09) in a student loan (debt)

    Month          Balance      1.5%    0.0225%
                     £750.00    £11.25     £0.16
    M1 (Y1)     £761.41*    £11.42     £0.17
    M2 (Y1)      £773.00     £11.60     £0.17
    M3 (Y1)      £784.78     £11.77     £0.18
    M4 (Y1)      £796.73     £11.95     £0.18
    M5 (Y1)      £808.86     £12.14     £0.18 
    M6 (Y1)      £821.18     £12.32     £0.18
    M7 (Y1)      £833.68     £12.51     £0.19 
    M8 (Y1)      £846.38     £12.69     £0.19
    M9 (Y1)      £859.26     £12.89     £0.19
    M10 (Y1)    £872.34     £13.09     £0.19    
    M11 (Y1)    £885.62     £13.28     £0.20
    M12 (Y1)    £899.08  £146.90   £2.18
    * Balance after amortised interest is added to M1

    The difference between the initial and final balance after Y1 is completed = £149.08 (£899.08 – £750)
    and is the total accrued and amortised interest at end Y1.

    The total new debt on £9,000 -> £9,000 + £146.90 + £2.18


    This is the new total debt balance at end Y1, generated from Y1 only (and no 'contribution' has yet been made - DA). This is invisible unless a specific request is made for a current balance. This seems to be the case since statements are not sent unless explicitly requested only after the 3- or 4-year term is complete. Ideally, the request should be made at the end of M1. The system only suggests, and does not explicitly clarify the potential growth of the debt (loan). All loans have an associated interest and that creates the complete debt only after amortisation. It’s a basic tenet of banking. The unasked (and certainly unanswered - DA) question remains:

    When does the interest clock start ticking?

    At the beginning or at the end of the loan (debt) period? If at the end of 3 years [or 4 years (£36,000) or 5 years (£45,000) for a medical doctor or...] this would constitute a free loan for 3, 4, or 5 years (from Day 1 of Y1). This is contrary to the lending ethic and the student would be expected to be mmust become a debtor from Day 1 of Y1 (!!! DA).

    Interest on the original advance (tuition fees are paid ‘up-front’ and so constitute the newly created debts to the new student). But is the debt actually created at the beginning or end of the 1st, 2nd, 3rd, 4th or 5th year period? The official description is complete misdirection since the student does not pay ‘up-front’. This is settled (invisibly) by the government on behalf of the student. The debt will have been started from Day 1 of Y1, but has the student been informed of their full liability? Y2 is similarly paid ‘up-front’. And Y3, Y4 and Y5.

    Is the student fully aware of their
    (potentially) growing liability?

    Many students will not consider their debt so early as Day 1/Y1 and is similar to working-lifetime pensions schemes of 30-40 years. Such a long time into the future is probably ignored by the 18-something student. The younger the individual, the less likely is an individual to consider pension provision. Today (2010) with the problems surrounding pension scheme failures, this renders any likelihood even more remote. Legally 'lost' contributions.

    The second year additional loan of £9,000 is added to the end of first year balance (Day 1 of Y2 is £9,149.08 + £9,000 = £18,149.08. Amortisation will follow very quickly at the end of the first month M13 and includes continued amortisation of the original Y1 debt. So, instead of an expected debt of £18,000, this could be higher. The following (Y2) has an initial balance of £18,149.08 from the 1st day. The expected debt at end Y3 (Y4 or Y5) then becomes even more skewed with nasty surprises stacking up. 

    Amortisation continues on the already

    once amortised Y1 interest

    And still no repayments are likely to have been made so the interest yield is once again maximised. Amortisation is calculated monthly to maximise the yield from the debt.

    A lender gives interest only once yearly

    so not involving amortisation – DA.

    Amortisation is one-way traffic

    Y2: Initial debt = 12 x monthly £1,512.42 (£18,149.08 = 9,000 + £9,149.08)

    Carried forward from Y1 = (£9,000 + £9,149.08 = £1512.42/month)

    Month          Balance        1.5%     0.0225%

                    £1512.42   £22.68     £0.34
    M13 (Y2)   £1535.44*  £23.03     £0.34
    M14 (Y2)    £1558.81    £23.38     £0.35
    M15 (Y2)    £1582.54    £23.73     £0.35
    M16 (Y2)    £1606.62    £24.10     £0.36
    M17 (Y2)    £1631.08    £24.46     £0.36
    M18 (Y2)    £1655.90    £24.83     £0.37
    M19 (Y2)    £1681.10    £25.21     £0.37
    M20 (Y2)    £1706.67    £25.60     £0.38
    M21 (Y2)    £1732.65    £25.99     £0.39
    M22 (Y2)    £1758.94    £26.38     £0.39
    M23 (Y2)    £1785.71    £26.78     £0.40
    M24 (Y2)   £1812.89  £296.17  £4.31

    * Balance after amortised interest is added to M2
    The difference between the initial and final balance after Y2 is completed = £300.47 (£1812.89 – £1512.42)
    and is the total accrued and amortised interest at end Y2.

    The total new debt on £18,000 -> £18,000 + £296.17 + £4.31 


    (Minor errors of about £0.01 introduced by rounding up/down)

    New total debt balance at end Y2 = £18300.48, but generated from Y2 only. The total cumulative debt over £18,000 + Y1 + Y2 = £149.08 (Y1) + £300.47 (Y2) = £18,449.55 (Y1 + Y2)

    The 3rd year involves yet another advance of £9,000, so the starting debt for Y3 becomes: £18,449.55 + £9,000 = £27,449.55/12 = £2287.46

    Month          Balance      1.5%      0.0225%
                    £2287.46    £34.31      £0.51
    M25 (Y3)  £2322.28*    £34.83      £0.52
    M26 (Y3)    £2357.63    £35.36      £0.53
    M27 (Y3)    £2393.52    £35.90      £0.54
    M28 (Y3)    £2429.96    £36.45      £0.55
    M29 (Y3)    £2466.96    £37.00      £0.55
    M30 (Y3)    £2504.51    £37.56      £0.56
    M31 (Y3)    £2542.63    £38.14      £0.57
    M32 (Y3)    £2581.34    £38.72      £0.58
    M33 (Y3)    £2620.64    £39.31      £0.59
    M34 (Y3)    £2660.54    £39.90      £0.60
    M35 (Y3)    £2701.04    £40.51      £0.60
    M36 (Y3)    £2742.15  £447.99   £6.70

    * Balance after amortised interest is added to M3

    (Y3) £2742.15 – £2287.46 = £454.69 (£447.99 + £6.70)

    New total debt balance at end Y3 = £27,454.69, but generated from Y3 only.

    The total accrued debt is Y1 + Y2 + Y3
    £27,000 (3 x £9,000)

    + £149.08 (Amortised interest  on £9,000 from Y1)
    + £300.47 (Amortised interest on £18,000 from Y2)
    + £454.69 (Amortised interest on £27,000 from Y3)

    Y4: Grand Total: £27,904.24

    The annual liability starts small, but grows. As each year’s tuition fee (annually = £9,000) is added and interest applied (and then amortised):

    M1   (of Y1)     =   £750.00
    M13 (of Y2)     = £1512.42
    M25 (of Y3)     = £2287.46

    The obvious benefit to a lender (government) is that if the course is terminated early for any unexpected reason, the debt is still worked out and payable from Day 1 of the first part (year) of the advance. The contract for tuition is between the student and the university, but the contract for payment is with the Student Loans Company (government). Withdrawal from a course and any ‘up-front’ payment (at the beginning of the Y2 or Y3) for that entire year has been paid and unless recovered by the student must still be repaid (with interest). Any communication of a possibility that the advance might not be forthcoming then results in the student becoming anxious and possibly chasing after and acquiring the debt. The debt is (psychologically) moved to being something desirable.

    Simply by the threat of withholding it

    • This entire argument must be speculative since no information is available to answer any of the issues raised. This ‘fact’ by itself screams caution and...


    Walking into the trap fully awake and with
    eyes wide open does not protect against
    potential financial entrapment