University Challenge: Dissecting Student Loan RPI

For those fans of the above and its host who smugly ridicules the students when they get answers wrong – he is looking at the answer, you will be disappointed to learn that this blog is not about the BBC2 show.

As we enter the first month of autumn, students are either returning to their universities or starting their courses after their A level results in August. Previously quiet towns and cities over the May to September period, will now be overflowing with energetic, predominantly, young people.

The challenge for many of them is that over the summer they will have arranged student finance and realised that by the time they leave university they will have racked up a fair amount of debt via tuition fees and living costs.  Of course, if they never earn enough (over £21,000 per annum), they will not have to repay the debt but that is hardly aspirational! Studies estimate that in total, three quarters of all students will never repay their loans.

As the father of one at university and the other about to start, I’m familiar with the psyche of students who feel the desire to earn a degree but do not want to leave university with a substantial debt burden.   Even if I help them along the way, laudably, they want to be financially self-sufficient as soon as possible.

Profit Centre

What I find particularly irksome is that the Student Loans Company, a government entity, chooses to apply the Retail Price Index (RPI) as the basis for the rate charged (even though the Office for National Statistics depicts it on the graph below as no longer a national statistic).

The government seems to view the application of inflation rates as a profit margin. Preferring to distribute disbursements to other entities or people based on the Consumer Price Index (CPI) while charging rates of interest on loans based on RPI.  As the chart below depicts, there is a one per cent difference between the two.

For those of you wondering what the CPIH (CPI plus housing) figure was, it was the same as CPI, 2.6%.

For those of you wondering what the CPIH (CPI plus housing) figure was, it was the same as CPI, 2.6%.

Source: Office for National Statistics

NB: The illustration uses an RPI rate of 3.1%. This is as a result of the student loan rate being reset every six months based on the RPI rate six months previously so for those readers that noticed that the last RPI print from August 2017 was 3.6% not 3.1%, that is the reason for the disparity.

Be Careful What You Wish For

So, whatever rate you pay or whatever your views on student loans are, it seems unfair to apply a higher rate of inflation through RPI, largely abandoned by the Office for National Statistics, as a mechanism to add an additional burden on those who have opted to pursue further education at university.
Of course, Jeremy Corbyn ‘suggested’ that tuition fees would be abolished under a Labour government but in reality that is unlikely under any government due to cost.

What to do?

Whatever margin over inflation students might end up paying depending on their salary post university, you would think there might be a relevant investment vehicle that parents, grandparents et al might consider as a means to offset some of this likely debt acquisition. There would appear to be few but our own T. Bailey Dynamic Fund with an explicit investment objective to deliver UK inflation plus 3% over a market cycle, could be deemed to be one of the more relevant choices.

Other investment solutions might be available. This blog does not constitute investment or financial planning advice.

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