Are student loans a good idea

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Well most people seem to regard to new student fees regime of up to £9,000 per year as a bad deal for the students, however a quick look at the mechanics of the arrangement prove that the debt is still probably the best form of debt anyone is offered in their lives.

The central idea is that the loan is repaid when after graduation the student gets a job and pay the loan back as a form of an additional tax on earning, like a PAYE payment. The maths however mean that is a full loan is taken out then the loan is likely to not be paid in full by the end of the term of the loan, unless you are lucky enough to get a very good job. Let us assume that the student takes out a loan of the full amount of the tuition loan, ie £27,000 (3 X £9,000).

The graduate then obtains a job at the average salary of £25,000 from the age of 22 to 50 year old when the loan term ends and the amount is written off. As the rate is 9% of wages over the amount of £21,000 they would pay £360 per year (£25,000 less £21,000 X 9%). Over the 28 years of making the payments only £10,080 is repaid. With the loan plus compound interest of say 3% over the period the amount owed is now £61,774 (27,000X(1.03 power 28)) a repayment of £10,080 means the total written off by the goverment would be approximately £51,694. 

The conclusion is that unless the scheme changes or you have an adversion to debt it is usually always goin to be worthwhile to take out the debt, so parents paying their offsprings fees out of familial duty may simply be a poor financial choice. Whether or not these loans represent good value for the tax payers is of course another question entirely.