Q&A: How the student finance calculator works

• 15 September 2011

BBC News has designed a calculator to give people an idea of how much it may cost them to pay off their student loans under the proposed new financing system.

In order to do so, we have had to use various averages and assumptions about the future of both the UK economy and the individuals involved.

It is not supposed to give precise predictions about future payments for individuals, but rather to illustrate the cost of the financing in various scenarios.

Remind me how the student loan system works

Students borrow money to fund their studies, which can be made up of up to £9,000 a year of tuition fees and up to £5,500 a year of maintenance loans.

While they are still studying they are charged interest on those loans at a rate of inflation (RPI) +3%.

In the April after they graduate they are eligible to start repaying the money.

They will pay back 9% of any earnings they make over £21,000.

The amount of interest they are charged each year will depend on the amount they earn.

If they earn £21,000 or less they will just be charged RPI inflation.

If they earn over £41,000 they will be charged RPI+3%.

The rate will increase in a straight line between £21,000 and £41,000.

After 30 years, any remaining debt will be written off.

How does the calculator work?

The Office for National Statistics has provided us with figures for average earnings, broken down by sex, age group and career group.

The central assumption is that your earnings at any age may be estimated by looking at how much the average person at that age in your career group would have earned this year and then adjusting that for predicted growth in the economy.

All the answers given are in 2011 pounds, which means users can consider the future payments based on how much they could buy today with the amount of money given.

The age groups are in five year groupings, which is why there are often jumps in the graph every five years.

The calculator is based on interest rates specified for the 2012 intake, but the government can, with parliamentary assent, change these up to market rates in future.

Why is this so complicated. Isn't it just like paying off a mortgage?

There are crucial differences between a student loan and a mortgage.

With a mortgage, the bank charges you interest and expects you to repay the debt no matter what. If you don't they repossess your home.

That would not work with student finance. With student loans, the amount you are required to repay depends on your own personal future income.

A student loan is not secured on anything, but if you are earning more than £21,000 it is difficult to avoid making payments because the government can take money directly out of your pay.

On the other hand, if you are earning less than £21,000 you do not have to pay anything and after 30 years any money you have not repaid will be written off.

For the calculator, the link to income means that in order to estimate your repayments we first have to forecast your future income, which is a tricky task, and something that is not necessary for calculating mortgage repayments.

Any attempt to provide universal answers will require assumptions to be made and averages to be used.

The answers given are based on the median earnings in each age group and career group, which is the earnings figure at which half of people in the group are earning more and half are earning less.

We have assumed that earnings overall will go up by RPI+1.5% a year and that RPI will be 2.75% a year. These are the same assumptions the government makes in its own modelling.

We have also used the government's figure for the discount rate, which is RPI+2.2%.

The discount rate reflects the greater value of money today compared with money in the future.

The discount rate is the answer to the question: "how much more money would I have to offer you in one year's time to make you take that instead of the money today?"

Are there any factors you have had to leave out?

The model does not allow us to include years when people are not working.

During such years, people would not be making any repayments but they would still be charged interest on their outstanding debt, so it would take longer to pay off.

Because median earnings are being used, we have not been able to take account of the fact that some people in career groups earn significantly less than others.

So in the health section, for example, consultants earn considerably more than nurses.

If you feel that the predicted wages do not fit your own expectations then try a different career group and see if that provides a better fit.

Another flaw in the figures is that the average earnings are for all employees in those areas, not just graduates.

If the income you earn over your lifetime turns out to be different to the forecast used in our model - particularly if it turns out to be much lower - then your loan repayments can end up being quite different.

Nonetheless, we feel that the figures provided give useful guidance to the sort of amounts graduates will have to pay to finance their loans.

The model also does not take account of potential penalties for early repayment because the government has not yet given details of them.

If you would like to see another approach, go to the Department for Business Innovation and Skills website go to the bottom of the page and click on the BIS student loan repayment ready reckoner. It features 4,041 examples of people with their lifetime earnings and how much they would pay.

Can I change the assumptions that have been made?

Yes. If you download the attached spreadsheet then you can change many of the assumptions that have gone into the calculation.

You will find most of the assumptions as well as places to fill in your own circumstances on the first page of the spreadsheet, called "control".

The second page, "ONS Data", features the raw earnings figures on which the calculation is based.

Page three, "Income" shows how much the model finds you to be earning each year. You can use the column labelled "Income overwrite" to change any of the annual salaries if, for example, you want to see what effect it would have if you took a career break.

The last two pages show the annual repayments you would be making under the old and new methods of financing.

Thanks to Derek Bird and Ryan Pike from the earnings department at the ONS for providing the figures and helpful advice, and Elliot Varnell of The Actuarial Profession and Martin Conyon of Wharton School, University of Pennsylvania for generous advice. The calculator was developed by Tom Pearson and Martyn Rees and designed by Salim Qurashi.