The popular money-saving expert kicks off his new monthly column with a look at tuition fees in UK

Martin Lewis: check the maths before paying tuition fees upfront
The popular money-saving expert kicks off his new monthly column with a look at tuition fees

Check the maths before paying tuition fees upfront Photo: HEATHCLIFF O'MALLEY

Martin Lewis

7:14AM GMT 20 Dec 2011

Don't pay your children's tuition fees for them. This isn't a ''let the little blighters pay their own way'' rant, it's a warning to check the maths first. Detaching the noose of student debt may feel laudable, but could leave some throwing away tens of thousands of pounds.

It's now less than a month until UCAS applications for 2012 students close. Yet across the country there are myths and misunderstandings about the new £9,000 annual tuition fees in England. Many parents are scrimping, saving or even borrowing so that their offspring needn't be burdened with them.

Yet while we call it a student loan, it isn't a loan in the traditional sense. It's a hybrid form of finance, nestling half way between traditional borrowing and taxation.

While many parents' understandable reaction is to throw the kitchen sink at rescuing their children from this perceived debt, shelling out may not be the best course of action.

Put simply, many students won't repay even close to what they've borrowed before the debt is wiped clean after 30 years; and if that's the case, paying upfront is a waste. Yet that message isn't getting out there.

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A costly role model

Some weeks ago a newspaper called me for a comment: "We've a great story. A girl has saved up nearly £30,000, so her parents won't have to borrow to pay her £9,000 tuition fees – she's a role model." They thought I'd whoop for joy at her savvyness, but while it's a "bravo" for the savings habit, the statement is wrong in so many ways and risked doing damage to her parents' finances.

First, everyone must understand that neither parents nor students pay tuition fees: graduates repay them, but only if they earn enough after they leave. The potential nightmare stems from the implication that this girl's parents had planned to take on commercial borrowing so that she could avoid a student loan. In most circumstances, financially, this would be an aberrant decision.

Unlike normal debts, student loans do not go on credit files, repayments are proportionate to income, which stop if you lose your job, and there are no debt collectors. And while 2012 starters' interest rates are sadly increasing – they're currently at RPI (Retail Prices Index) plus 3 per cent – in the long run they're still far cheaper than credit card and loan deals.

Pay upfront and you could lose £10,000s

Assume the simple scenario of students paying the £9,000 fees each year upfront. Then after they graduate they become low-paid artists, full-time parents ... any scenario where they never earn over the £21,000 salary threshold for paying back the funding. In these scenarios, the £27,000 would have been paid unnecessarily.

While those are extreme cases, the inspiration for this advice came when I first plugged a nerdy calculation into my studentfinancecalc.com tool. I couldn't quite believe what I saw.

Repaying a student loan is not like repaying a loan from the bank. It is linked to how much you earn, rather than how much you borrow.

Graduates only repay 9 per cent of any earnings above the threshold limit of £21,000. So if you earn £22,000 in your first year you repay just £90 of the amount you borrowed to pay for your fees.

If at the end of 30 years the total amount you have repaid fails to cover the total amount you borrowed plus interest accrued, it won't matter as the outstanding amount will be written off.

It is also worth noting that the payment threshold will rise each year, in line with earnings (we don't know how as yet), so if your pay rises do not keep up, your repayments could fall.

Using my online calculator, a new graduate earning £25,000 who took out a student loan for both the tuition fees and the maintenance fees amounting to £46,400 in total, would pay back just £3,400 more over 30 years than if he or she had borrowed only the maintenance fees of £21,500 and paid the £27,000 tuition fees upfront.

However, if a student earned £35,000 in their first year, which then rose at 5 per cent above inflation, paying the tuition fees upfront and using a student loan to pay for the maintenance fees would work out cheaper.

I have calculated that you would repay £49,700 less over the 30 years if you borrowed just the maintenance fees, than you would if you'd used a loan to pay for both tuition and maintenance fees (though you'll have paid £27,000 in tuition fees upfront).

Yet short of employing a crystal ball, how do you know whether an 18-year-old student will be a future high earner? Even those starting higher education destined for medicine, the Bar or the City might change their minds, not get the grades, go into local politics or become full-time parents.

Stash the cash until you know more

The simple strategy is to put spare cash into a top cash Isa or savings account until graduation, when a student will have a better idea of earnings potential.

However, be aware that while studying, the loan interest will be RPI plus 3 per cent, which will not be fully offset by savings interest. So weigh that up against the risk of paying upfront unnecessarily.

A bigger spanner in the works is the Government's ongoing consultation on whether it should introduce early redemption penalties. In my view that would be a perverse decision, as we've been banning it in the private sector for an age. If it did happen, it would shift the risk balance.

Use the money to prevent 'worse' debt

After studying, many go on to buy a house or get a car loan. While personal loans are at far higher rates than 2012 student loans, in the long run mortgages are likely to be roughly on a par. Yet a cash lump sum used as a substantial deposit could enable much cheaper borrowing and decrease the risk of arrears if you had a work break or income fall.

It isn't a sensible strategy to use the cash to avoid a student loan if you'll effectively need to borrow it back from a commercial lender later.

So that's the maths, but of course that isn't the be-all-and-end-all: the moral decision is yours. Many want to discourage debt-averse behaviour. And bear in mind that if you have the cash, but deliberately don't use it as your child will not need to repay the funds in full, it's the Treasury and taxpayer who foots the bill.

Martin Lewis is the creator of www.moneysavingexpert.com and head of the Independent Taskforce on Student Finance Information.

http://www.telegraph.co.uk/finance/personalfinance/consumertips/8967331/Martin-Lewis-check-the-maths-before-paying-tuition-fees-upfront.html

Taking a loan in your golden years

Taking a loan in your golden years
Written by Celine Tan of theedgemalaysia.com
Monday, 31 October 2011 07:48


Banks might be reluctant to lend to retirees but there are ways to increase your chances of getting a loan


For retirees, the best practice is to live on cash. Says Ng Chee Yong, a licensed financial planner at the financial care centre of wealth solutions provider CWA, “Whenever possible, pay with cash. A loan is taken to finance items that you cannot afford, a situation that retirees without a steady income should avoid.”

Nevertheless, unforeseen events or emergencies may compel you to borrow. For instance, an offspring may face financial difficulties and most parents would find it difficult to deny assistance. Or you might want to start a business or invest in properties. “After retiring at 55, many retirees start small businesses.

It is not surprising to find them applying for business or personal loans,” says Thoo Mee Ling, head of secured lending at OCBC Bank (M) Bhd. “Apart from that, those who are active in the property market will continue to buy and sell. They need to turn to banks for home loans.”

Louis Loh, business development manager at VKA Wealth Planners Sdn Bhd, says most of his retired clients take loans to buy new cars or refinance their homes.

“Some retirees may prefer to get a loan when purchasing big-ticket items although they can afford them. They think that they will be audited by the Inland Revenue Board if the items are paid in cash.”


Generally, financial institutions deny loans to those who are not earning an income. However, you can obtain a loan in certain situations, especially if you have planned for it. Here are six tips to maximise your chances of getting a loan in your golden years.

1 Take the loan before you turn 60


Each financial institution implements and adheres to a set of lending guidelines. “The guidelines are essential for the bank to manage its risk and returns. These guidelines include risk criteria set out by regulatory bodies such as Bank Negara Malaysia. Age [of borrowers] is a variable that a bank controls through its lending guidelines,” says Thoo. “If you think that you might want to get a loan during retirement, it is best to take the loan before you turn 60. The most ideal time is between 50 and 55,” says Loh.

2 Cut margin of finance and/or loan tenure


“Nowadays, some financial institutions prefer to give out lower margins of finance because they want to decrease their non-performing loans. Generally, banks will give loans to retirees who ask for a 50% margin of finance,” says Loh.

“If you are 56 and want to get a 15-year loan, the financial institutions may be concerned. But, if you want to get an eight- or 10-year loan, they are more comfortable with it. In addition, this lowers your borrowing cost,” says Ng.


Loh observes that it is far easier for retirees to obtain car loans, which have short tenures of two to five years, rather than home loans. “Note that most financial institutions are reluctant to give out loans to retirees over 60 even if they have repayment capacity or are willing to cut the loan tenure.”

3 Document your sources of income


One of the most important aspects of getting your loan approved is your repayment capacity. “Your income [finances] must be able to prove that you can,” says Loh.

“Make your income ‘official’. For instance, if you sell cakes or babysit, legalise your business by setting up a sole proprietorship. This will need few months of planning,” suggests Ng.

If you are going to use rental income to support your loan application, provide proper documentation. “Get your tenancy agreement stamped and keep all records of payments. Get the tenant to bank the rent into your account,” says Ng. Besides receiving a continuous stream of income from these assets, Loh adds that your chances of obtaining a loan will improve if your existing properties are fully paid up.


But, bear in mind that financial institutions only consider income that is consistent and secured. “Lenders generally do not favour lending to insurance agents, unit trust agents, direct-selling marketers, remisiers or brokers. This is because their incomes are based on renewal of sales and the lenders assume that such income will not last for a long time, unless they have a group of people to continue running their business,” observes Loh.

Therefore, it is essential to build up a sizeable passive income stream prior to your retirement. Passive income can be generated from rental, dividends from shares, bonds and unit trusts, or commissions. “[Passive income] complements our pension fund and supports our repayment capacity,” says Thoo.


4 Get a guarantor or joint borrower

Generally, financial institutions prefer to give loans to retirees who have a guarantor or joint borrower. “By guaranteeing the loan, the guarantor or joint borrower, usually a family member, is legally liable for the repayments as well,” says Thoo.


Loh observes that financial institutions prefer a joint borrower to a guarantor. “This is because a joint borrower is seen as having more commitment than a guarantor. However, where the joint borrower has a high debt-asset ratio, the financial institution may consider him as a guarantor instead.”

If you ask an income-earning family member to support your loan application, document the agreement. “You need to put everything in black and white. Inform those involved and communicate your plans,” says Ng.

If you are taking a mortgage loan, determine if the joint borrower will co-own your property. If not, this arrangement is tricky and can affect your estate. Also, note that the joint borrower or guarantor will have to continue servicing the loan should you pass away. “If the loan is not insured, your child will be burdened if you pass away while servicing the loan. The debt will not stop when you die, but will pass on to your legal beneficiaries,” says Loh.

5 Pledge collaterals



Collateral such as fixed deposits, unit trusts and shares can be pledged when applying for a loan. “As a rule of thumb, fixed deposits are favoured because they are liquid assets. Most banks, if not all, will offer a 100% loan if it is collateralised by a fixed deposit. Unit trusts and shares can be offered as well, although the margin of finance varies, depending on the bank’s risk appetite,” says Thoo.


If you pledge your fixed deposit, you cannot use the funds in the account throughout the tenure of the loan, says Loh. “Usually, banks will ask for a RM20,000 fixed deposit or a sum equivalent to 10% of the property’s value. This is the minimum amount needed to auction off the property if the borrower defaults.”



Financial institutions typically do not ask for property as collateral for a personal loan. “They are not in the business of liquidating such assets,” says Ng. The bank will incur a cost in holding a property auction and the price of the property will usually be lower than the market rate, explains Loh.

6 Stick to the same bank


Where possible, build a relationship with your banker. “If you have a good relationship with your banker, it might be easier for you to get a loan. For instance, if you always get your loans from the same bank, it might be more lenient and go the extra mile for you,” observes Ng.

http://www.theedgemalaysia.com/personal-finance/195379-taking-a-loan-in-your-golden-years.html

What should investors look for when investing in banks and other financiers?

What should investors look for when investing in banks and other financiers?

Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits.  Here's a list of some major metrics to consider.

Strong Capital Base

A strong capital base is the number one issue to consider before investing in a lender.  Investors can look at several metrics.

• The simplest is the equity to assets ratio; the higher, the better.  The level of capital should vary with each institution based on a number of factors including the riskiness of its loans.  Most of the bigger banks have capital ratios in the 8% to 9% range.  
• Also look for a high level of loan loss reserve relative to nonperforming assets.

These ratios vary depending on the type of lending an institution does, as well as the point of the business cycle in which they are taken.

Return on Equity and Return on Assets

These metrics are the de facto standards for gauging bank profitability.  

Investors should look for banks that can consistently generate mid- to high- teen returns on equity.  

Ironically, investors should be concerned if a bank earns a level not only too far below this industry benchmark, but also too far above it.  After all, many fast-growing lenders have thrown off 30% or more ROEs, just by provisioning too little for loan losses.  Remember, it can be very easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, but this can be unduly risky over the long term.  For this reason, it's good to see a high level of return on assets, as well.

For banks, a top ROA would be in the 1.2 % to 1.4% range.

Efficiency Ratios

The efficiency ratio measures non-interest expense, or operating costs, as a percentage of net revenues.  

Basically, it tells you how efficiently the bank is managed.  Many good banks have efficiency ratios under 55% (lower is better).

Look for banks with strong efficiency ratios as evidence that costs are being kept in check.

Net Interest Margins

Net interest margin looks at net interest income as a percentage of average earning assets.

Virtually all banks report net interest margins because it measures lending profitability.  

You'll see a wide variety of net interest margins depending on the type of lending a bank engages in, but most banks' margins fall into the 3% to 4% range.  

Track margins over time to get a feel for the trend - if margins are rising, check to see what's been happening with interest rates.  (Falling rates generally push up net interest margins.)

In addition, examine the bank's loan categories to see whether the bank has been moving into different lending areas. For example, credit card loans typically carry much higher interest rates than residential mortgages, but credit card lending is also riskier than lending money secured by a house.

Strong Revenues

Historically, many of the best-performing bank investments have been those that have proven capable of above-average revenue growth.  Wide margins have generally been elusive in a commodity industry that competes on service quality.  But, some of the most successful banks have been able to cross-sell new services, which adds to fee income, or pay a slightly lower rate on deposits and charge a slightly higher rate on loans.

Keep an eye on three major metrics:
(1) net interest margin,
(2) fee income as a percent of total revenues, and
(3) fee income growth.

The net interest margin can vary widely depending on economic factors, the interest rate environment, and the type of business the lender focuses on, so it's best to compare the bank you're interested in to other similar institutions.  Fee income made up 42% of bank industry revenue in 2001 and has grown at an 11.6% compound annual rate over the past two decades.  As always, examine the number over a  period of time to get a sense of the trend.

Price to Book 

Because banks' balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock.

Typically, big banks have traded in the two or three times book range over the past decade; regionals have often traded for less than that.

A solid bank trading at less than two times book value is often worth a closer look.  Remember, there is almost always a reason the bank is selling at a discount, so be sure you understand the risks.  On the other hand, some banks are worth three times book value or more, but we would exercise caution before paying that much.


The Five Rules for Successful Stock Investing
by Pat Dorsey


Summary:

Equity to assets ratio (capital ratio):  8% to 9% or greater
Loan loss reserve:  High level of loan loss reserve relative to nonperforming assets.
ROE: mid- to high- teen ROE
ROA:  1.2% to 1.4% or higher
Efficiency ratios = (noninterest expense or operating costs)/(net revenues):  < 55% (lower is better)
Net Interest Margins = net interest income / average earning assets:  3% to 4% range
Strong above-average Revenue growth: Look at net interest margin + fee income as percentage of total revenue + fee income growth
Price-to-Book:   Big banks often trade at P/B 2 x  to 3 x range.

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