Q&A: What are student loans and how will they work?

With all attention strongly focused on the possible introduction of income-contingent student loans, Niall Murray examines what they are, how they might work — and at what cost.

What is an income-contingent loan?

An income-contingent loan — let’s call it an ICL —would be designed to make college free at the point of entry. The loan would be paid back, probably at interest rates lower than commercial borrowing, only when a graduate reaches a pre-determined annual income.

Bottom line, what’s this going to cost if I’m a student starting college in a few years?

How long is a piece of string? The Cassells report offers a number of examples, but based on the standard annual fee of €4,000 or €5,000 a year for a four-year course.

Are those the fees that will be decided?

Nothing is decided. Even if a loan scheme is politically approved, colleges would set fees, with maximum charges probably to be regulated.

So, let’s pretend that after leaving college with a degree after four years, I’ve got a €20,000 fees debt. How much is that going to cost me in the long run?

The report is based on repayments only kicking in once income exceeds €26,000 a year, but either 8% of all earnings above that figure go towards financing the loan, or else something between 2% and 8% of all income, depending on that income level.

Okay, bottom line again: What’s that going to cost every month?

Right, there are differences for men and women, based on their different average earnings. If interest rates are set at 2%, a woman with a €16,000 debt on an average income (the report uses income percentiles rather than actual earnings), would pay back €104 a month over 15 years. While she would have the loan repaid by age 39, someone nearer the lower income brackets could be paying back until their early 50s, but only at a rate of €10 to €70 a month depending on earnings.

What if the loan amount was €20,000?

That would see the average monthly repayments increase only slightly to €112, but over 18 years instead of 15. Both these examples also assume that repayments are based on 8% repayment on income over €26,000 a year.

So are those the actual costs that would be in play?

Not at all. These are just some of the examples, and are based on the assumptions used above, none of which have been decided.

Is there any point in considering the likely cost of this scheme, if nothing has even been decided?

Possibly not, but the figures in the report may be useful to debate, as they give an indicative suggestion based on various scenarios.

Are there other factors that would go into calculating loan terms and costs?

Yes. These include questions about how the Government would finance the capital to arrange these loans, how the effects of this on budgetary deficit would play with EU debt rules, and whether arrangements can be made to collect repayments from emigrants.