Student Debt: Facts and Predictions

Last night I tweeted this image.

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It’s from the Greens’ website, What Will My Degree Cost? You type in some variables and it spits out a figure that’s supposed to be your predicted net debt if you want to go to uni under the radically different higher education model proposed in this year’s federal budget. The above graphic was generated when I put in that I wanted to study medicine and hadn’t yet begun my degree.

As many people have pointed out: no, it’s not precisely accurate. That’s not because it’s ‘Labor-Green propaganda’ or because ‘Lefties are dumb’ or even because we don’t have mathematics degrees. It’s because there are no certainties upon which projections can be based. However, the makers of the website have discussed the underlying assumptions in their model here.

Fee deregulation literally means that universities can charge whatever they want for their courses. The VC of UTAS has recently said that, with the drop in federal funding, there will be a $30 million gap in the budget that will somehow need to be filled. The VC of the University of Melbourne recently said that course fees are likely to rise up to 61% – and that was only for ‘average’ courses like Arts and Science. Many others have said that course fees will almost certainly rise significantly, including The Conversation, Gay Alcorn, Greg Jericho, and Ross Gittins.

Of course, until deregulation actually happens, we won’t know exactly what the course fees will be. It’s likely that some universities will charge higher fees than other universities. Higher fees may or may not reflect a more prestigious or higher quality course offering. We simply don’t know yet.

What we do know is what has happened in other countries. In the USA, an undergraduate degree at Harvard, an Ivy League school, will cost you $44,000 per year. A post-graduate law course (remember they will only let you study law if you already have a bachelor’s degree) will set you back $54,000 per year. The post-graduate MD course at Harvard will cost a similar $52,000 per year. This is likely what we’re heading for as we proceed towards deregulation and ‘free market’ ideologies that prioritise competition over fairness.

The tweet containing the image above has, at last count, been re-tweeted 355 times and been ‘favourited’ 94 times.

This has gotten me in a lot of trouble today as I became a punching bag for LNP die-hards and rabid tories. People accused me of being stupid, naive, of falling for ‘anything plonked in front of [me]’ and generally being gullible and unthinking. They said that it was ‘impossible’ that the figures in the above graphic could possibly be true, and that it was simply scare-mongering by the Greens and Labor. Basically: I’ve spent today being abused on the internet.

I don’t mind that. But it did get me thinking about what the actual mathematics involved are. It’s all speculation, as I mentioned above, but it would be useful to have some working shown rather than just an automatically-generated figure at the end of a web page.

So I decided to do some maths. Here’s what I came up with.

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This is what the first 36 years of your working life would look like if you completed a medical degree that cost you $40,000 per year and accrued interest at 6% per annum. It also assumes the new pay-back thresholds (between 4% and 8% of your yearly income). Based off this modelling, it would take you 61 years of work to pay back the debt, and by the time you’re debt-free, you will have paid a total of $1,584,000, most of which is simply the effect of compound interest.

The results are almost as dire if we use a model where the cost of a medical degree is $30,000 per year. It takes 36 years of work to pay back the debt and the total you will have paid by the end is $581,932.78.

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Again, while the degree cost is only $150,000 for five years, it’s the compound interest that really gets you.

The point of all this is to say: I’m not relying on shonky mathematics or Labor-Green propaganda to make my point. In fact, the original image I tweeted is a pretty conservative estimate.

I admit that you’d have to be pretty stupid to only be paying the minimum threshold repayments on a debt like this, especially on salaries of upwards of $150,000 per year. On the other hand, even if, upon getting a steady job, you begin paying off $10,000 or $15,000 per year (a pretty signifiant portion of your income at this stage), your debt level will still peak at at least $200,000. Even if you continue paying off significantly more than the 8% of yearly income required by the legislative scheme – say $20,000 to $30,000 per year – it still takes at least ten years, and probably more like twenty, to clear the debt. Remember that the ‘salary’ column is your pre-tax income; the actual amount you have to live on will be significantly less when you account for income tax on top of your HECS contribution. It’s also significantly harder to make extra contributions to pay off the debt when, for example, you’re financially supporting someone else (e.g. a partner; a parent; a family member who is sick or disabled), if you have children, or if you’ve been lucky enough to buy a house and need to also pay off your mortgage.

I have a post in the works about the merits (or otherwise) of various models of university funding and costs which will be much more in-depth. For now, I just wanted to stick it to all the people who been saying that the claims on the How Much Will My Degree Cost website are outrageous or absurd.

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2 Comments

  1. granleese

     /  June 6, 2014

    Your maths is definitely not shonky.

    The idea, however, that a person earning a salary of >=$100,000 cannot pay more than 8% of their salary towards student debt is. They would likely pay off double at beginning (and more once reaching >$200k) which massively reduces the size of interest in the beginning that has the most impact on compound interest.

    Banks would never let a mortgagee pay back only 5% of the principal each year (compound interest growth would outpace loan amounts). Loans often start out 14-15% of principal (borrowed amount) and reduce overtime to 4-5% until paid off 25 years later.

    The maths isn’t wrong or misleading here, but the modeling and comparisons are.

    Reply
    • Thanks for your comment.

      I have explained all of this in the post itself.
      I deliberately used a model where the repayments were only at the amount that is required by the HECS-HELP repayment scheme. You seem to be arguing that the Government is wrong to only recover the debt at a rate of between 4-8% of income each year – if this is the case, take it up with the government. I am simply working with the numbers that I have, which you can find here: http://studyassist.gov.au/sites/studyassist/payingbackmyloan/loan-repayment/pages/loan-repayment#HowMuchWillMyRepaymentsBe and which I already put a link to in the body of the post. While it may well be the case that banks would require a higher repayment rate for a loan such as a mortgage, the government is not a bank and their highest required rate remains 8% of taxable income per annum.

      I also mentioned the fact that, if you were earning in excess of $100,000 or $150,000 per year, you *would* be stupid not to be making extra repayments over and above that which is mandatorily required by legislation (second last paragraph). However, the assumption that I made quite clear in the piece is that repayments are being made at the rate set by the government.

      There is also the fact that the ‘salary’ column represents pre-tax income. Your actual take-home pay would be significantly smaller than this once you have taken out the amount you’ll be contributing to the HECS debt that year and the normal amount of income tax that you would be expected to pay (in the region of 40-45% on salaries like these). When your take-home pay comes down to about $70,000 after taxes and HECS repayments, I think you would be less likely to be making significant extra contributions over and above what is required.

      The simple fact is that, even in the second table (where the original loan amount is significantly smaller) you’ve already accrued $212,000 in total debt by the time you start receiving a salary above $100,000. Regardless of the rate at which you repay, the simple fact is that the longer you have the loan, and the bigger it is during that time, the more interest you have to pay. This is the case regardless of whether you’re paying it off over ten years or whether you’re paying it off over thirty. 6% p.a. of a >$200,000 debt is huge.

      Reply

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  • Things about me:

    My name is Mel, I'm a final year law student from Australia. I'm interested in politics, feminism, sociology and science, among other things. You can find my Twitter account below; I am more active there than here.

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