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Money Times - May 9, 2017

Posted by Jill Kerby on May 09 2017 @ 09:00

HOW PREPARED IS THE BANK OF MUM & DAD FOR COMPULSORY STUDENT LOANS?

Secondary students are hard at their books this month, preparing for their Junior and Leaving Cert exams in June. Third levels students started writing their exams last week, as I know from personal experience.

(I can’t wait to get the kitchen and breakfast ‘study’ room back, a much preferred option to the college library due to the presence here of a large fridge/freezer and coffee machine.)

It is also a time of year when parents start to ponder how to pay for next year’s college fees. Many are living in hope that they’ll avoid any new funding scheme under debate in the committee rooms of Dail Eireann. If reports are correct, it could be a loan scheme that could result in all Irish graduates typically repaying at least €150 a month for 10 years once they start working.

The Irish third level system has been remarkably generous for decades.  Three nephews of my husband avoided paying fees; my own son’s ‘registration charge’ has gone from €2,250 to €3,000 over the past fours, a fraction of what we would have paid if he was studying science in the United States or even England and Wales where the lowest entry fees are £9,000 a year. (Quebec, where I went to college also heavily subsidises undergraduate fees and charges about the same as Ireland.)

The ‘study now pay later’ loan scheme (one option from last year’s Cassells report) that the Oireachtas Committee on the funding of higher education is considering, is similar to the model used in Australia.

Described as ‘income contingent’, the €4,000 - €5 per year for four years loan, if introduced, would only start being repaid once the graduate found full-time employment with a salary of at least €26,000 and on average, would be repaid by age 33, according to the report. The more you earn, the higher the repayment, but there would also be repayment flexibility that would take into account periods of unemployment, illness or loss of income.

The Oireachtas is under pressure from the Universities (and the Department of Finance) to find them more money – at least €600bn more between now and 2021 and then another €1 billion a year until 2030, according to Cassells.

The introduction of fees for all students will go some way to meet this funding requirement, say the experts, but if the idea is to maintain access to third level education for everyone, regardless of income, then a loan scheme has to be introduced that eliminates the current grants subsidy that 50% of college going students currently enjoy, and is properly designed to ensure the money borrowed is repaid to the state, the banks or a combination of both.

With emigration part and parcel of the Irish graduate experience, the Union of Students of Ireland (USI), who oppose any loan scheme, say even writing off just 10% of income contingent loans is “hopelessly optimistic”. (Cassells predicted €10 billion over 20 years.) Certainly, more conventional loan schemes, no matter how low the interest, like the ones that operate in the US, can result in huge defaults. The US student debt bill (federal and private) has now breached $1.4 trillion with an estimated seven million defaulters.

Well-off students and parents already borrow money from Irish banks to pay for third level education. A four year loan from AIB worth €20,000 means monthly repayments of about €500 a month, repayable immediately, at interest of 8.5%. The total amount repaid will be about €23,500. This is certainly a better arrangement than dragging out capital and interest repayments for 10 years or more after graduation, but is clearly unaffordable for many students.

With some new student loan arrangement looking more likely, the next group of Irish third level graduates could very well end up paying considerably more than €16,000-€20,000 worth of fees (not including interest) – an amount which will probably only keep going up as the years progress.

Parents of younger children who want to avoid their kids starting their first jobs with substantial debt should consider themselves on notice. They should create a plan now that avoids the risk of having to resort to last minute, expensive personal or credit card loans to pay fees. (Drawing home equity is not an option.) 

They should start by saving the €140 a month (€1,680 pa) child benefit payment in a tax-free State Savings scheme. Even a mere 1.5% average return over 18 years will result in a final balance of nearly €34,700.  Investing the money would be better – so speak to a good, independent adviser - but they need to hope the 40% exit tax is eventually lowered or abolished.

Generous grandparents may also want to consider gifting up to €3,000 entirely tax-free to every grandchild every year to boost those education funds.

The days of free/low third level costs in Ireland are on their way out. Along with jobs for life, defined benefit pensions and, for the next while at least, affordable homes.

The less student debt our kids carry into their uncertain futures, the better.

 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

 

 

 

 

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