Last night, the BBC reported that under the new tuition fees arrangement graduates could end up paying back up to twice what they had borrowed. This was startling, until the crucial caveat was given that the numbers are in cash terms – they’re non-inflation adjusted numbers. In a report about loans that won’t be fully paid off until 2044 at the earliest, this is a big "but". Over this length of time, inflation can have an enormous impact, and it’s misleading for the BBC to (wilfully?) ignore this for the sake of an eye-grabbing headline.
The calculations are here (XLS), and estimate that a student who borrows £39,000 will end up paying back between £71,000 and £83,000 over the course of their lifetime in cash terms. At the 3% annual inflation rate the BBC assumes, over 30 years money's purchasing power will fall by half. In other words, £94,663 will buy as much in 2041 as £39,000 does today. Bearing that in mind, the £83,000 figure at the end of the loan's term seems quite a bit less daunting.
Of course, it’s not quite this simple – students don’t pay their loans all back in one lump sum at the end of the loan (and more interest would accumulate if they did), they pay them back regularly over the course of the 30 years. A pound paid back in the first year of the loan is worth a lot more in real terms than a pound paid back in the final year. Even so, the headline that graduates will pay back double is pretty misleading. Of course the loans will rise as inflation does – every loan’s interest rate is designed to factor this in.
The BBC hasn’t reported, say, government cuts “in cash terms”, even though government spending is rising in cash terms over the course of this government. It's right not to – nominal values are irrelevant in discussions of future costs and spending. So, why the double standard when it comes to this?
