See Left Foot Forward for the details
But how absurd that we now have a positive discrimination in favour of high earners.
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His analysis is incorrect. If interest is charged at a market rate, then all borrowers who actually repay their loans make payments with the same discounted present value. Bankers may pay less interest but by repaying their loans earlier than civil servants they forego interest that they could have earned on their cash if they had been allowed to repay with hte same profile as the civil servants.
@Alex
Surely you have to compare the interest rate available to savers with the interest rate on the loans rather than just talking about “the market rate” – there is no one market rate.
Browne suggests an interest rate on the loans of 2.2% in real terms. CPI is currently 3.1% which makes a nominal interest rate of around 5.3%.
Looking on Moneysupermarket for savings accounts interest rates you’d be very lucky to get anything above 2.75% at the moment.
So by repaying early, bankers forego interest that’s actually negative in real terms… given those kind of incentives I’d repay early if I could. And I’d be up on the deal.
If graduates need 30 years to pay off their student loans, god help the housing market.
That said, there are some degrees that will deliver very little in terms of monetary reward such as theology. There should ideally be some rebate provision for those that are not in good earning professions but have incurred liability to fund study in their chosen profession – provided that are actively employed in that profession.
@Alex
No his analysis is not incorrect. Yours is because you use the perversion, incomprehensible to empathic human beings, of discounted cash flow.
The reality is very different from your cold, rational, indifferent analysis which fails to recognise the human condition.
You value a pound as a pound irrespective of who has it. That’s not true. as pound has varying value – those who have fewer value each more, but you do not allow for that. So the rich do pay much less, even if they do actually pay more.
And people are not indifferent t time, as your calculation implies. A lifetime of debt is crushing for the human spirit. A few years is tolerable, maybe.
But this no doubt is beyond your comprehension, or Browne’s.
@JayPee
I despair of people like you
A degree is education, not training
Do you not understand the difference?
If not, go and get an education before commenting
@Richard Murphy
Yesterday you were using DCF to explain how the government loses money on tax foregone on capital growth in pensions.
Today you are describing it as a perversion!
Are you seriously suggesting the concept of DCF has no value?
If so, I’ll do a deal with you – you lend me £100k and I’ll repay it, no interest in twenty years time. Still comfortable with the notion that’s no such thing as DCF?
I notice in response to the article on IFA you say you have ignored future tax on pensions paid partly because the “discount rate is high”.
Yet here you are disputing the utility of DCF? I don’t understand.
@Brian Bradnock
I despair
Of course DCF can be used for systemic analysis
But it’s crass to think people ever undertake such a method of thinking when appraising decisions or their consequence or that they even approximate to doing so is just absurd
Open your eyes
See the world as it is
Or is that beyond you?
And can you only hold one idea in your head at a time?
@Howard
Howard. I take your point that Browne’s suggested rate implies that it is a beneficial rate, which in term implies an advantage to the less well paid who are able to spread their repayments over many more years and thus benefit from the lower cost of funds for longer.
One way of looking at this is that if the scheduled principal and (slightly below market) interest payments are discounted at a market rate, the present value of the obligations will be lower than the face value of the borrowing. The longer the ter,m of the loan, the greater the benefit.
That explains why some of the biggest and most successful companies in the world take my financial advice and not yours.
@Alex
And that also explains why they have failed to deliver any real returns for so long I suspect
@Malcolm Nisbet
|hope you do now, see my answer to Brian
@Richard Murphy
But we’re not talking about what individuals are or are not calculating in their heads, we’re talking about a method of determining whether bankers end up paying less than public servants. Here, DCF is clearly useful and appropriate.
I have come to the conclusion that your logic is all over the place, in this and virtually everything else you write.
@Richard Murphy
Actually I dispute that. Most people know that £100,000 today is worth more than £100,000 in the future. They might not know the intricate details of going about a NPV calculation, but they just instinctively know that something in the future is more uncertain than something in the present (which is basically what DCF says, stripped bare). Of course most people do not sit down at an Excel spreadsheet and type in the numbers. No is suggesting that. They don’t need to – because the concept is so well ingrained in most people’s minds that they don’t even realise they’re doing it.
@Malcolm Nisbet
But that’s not the way sees it
Which is what mattes
Justice cannot be determined by DCF
And that’s because DCF is a fantasy – it assumes the consequence of all future behaviour can be determined today
It can’t be
So whilst it has some use in some situations (and then it’s limited) it is useless for the purpose you claim it can be used for
@Brian Bradnock
What utter nonsense
That’s as crass as saying people income maximise – when I do not know a person who does – just because it’s clear they want some income
Imputing DCF as being the same as a time preference for money is absurd
Howard, that’s the wrong way round. By repaying early the bankers lose the ability to invest the early principal repayments elsewhere at a higher rate. If somebody is effectively lending money at a rate below the rate at which you could reinvest it (ignorng tax), why would you not borrow and invest?
@Alex
My point is that the (low-risk) investments available do not reach a high enough rate (at current interest rates) to make this worthwhile. Currently even the best available cash ISAs are paying negative real interest rates.
Of course, someone could choose higher risk investments, but then you’ve got to take preferences for risk into account as well.
Browne would hardly pick a figure based on current market rates, but go for a rate of return that he would reasonably expect to earn in any market (ie.e regardless of the state of the economy/inflation). The typical coupon for index-linked gilts over the last 20 years has been 2.5%, so assuming the Treasury intended to issue gilts at around par, we can take 2.5% as a proxy for the long term real rate of return required by the market. Which makes a real 2.2% cost of borrowing look very reasonable.
Why don’t you address my point instead of wandering off on a diatribe: where did I say a degree is a training not an education?
However it does raise an issue – when does education stop and training begin?
@JayPee
If we’re not speaking about the same issue answering your points is irrelevant
Education is according to Wikipedia “Education in the largest sense is any act or experience that has a formative effect on the mind, character or physical ability of an individual. In its technical sense, education is the process by which society deliberately transmits its accumulated knowledge, skills and values from one generation to another.”
I’d refine it at a university
Universities should promote learning for the sake of intellectual advancement
Training is applied study for the sake of economic gain