Fair points. Praveena will have a rather small amount of surplus at the end of the first year (859-420 = £439, that is a mere 3% of her annual net earnings). She might want to reduce some of her expenditure such as entertainment or make sure she works hard and get a promotion quickly.
2 marks
1.4 One year after moving into her flat, the main client of the laboratory withdraws their contact and the lab has had to cut down on wages. Praveena will have to work part-time from now on and see her gross salary halved. Her friend Natasha is also struggling and they decide to share Praveena’s flat for a while. Natasha earns £1000 a month gross and they agree to pool both their after-tax money to try to make ends meet.
Calculate the new household net monthly income. Using the ‘Household income equivalence calculator’, explain whether Natasha’s moving in has compensated for Praveena’s loss income.
Table 1.3. The new households income
The new household net monthly income is £1571,25. The standard of living based on equivalised income Praveena’s and Natasha’s is now the same as a childless couple with an income of £17,622. Natasha’s moving in has compensated for Praveena’s loss income, as the household income has increased by 18,2 %.
Sound calculation but the income equivalence calculator needed discussion.
If her gross salary is divided by two (=£9,750 pa), Praveena would now earn £8,651 net per year while Natasha earns £10,204 net per year. Their total household net income is thus £18,855, or £1571 monthly. This is more than Praveena’s past annual net earnings of £15,379. However, given that two adults now live together, they benefit from economies of scale in sharing some of the costs (mainly rent and council tax) but they also are likely to spend more on some goods such as food, water and leisure. Using the income equivalence calculator, the total net income this household should have to grant Praveena a similar standard of living as before (and provided their pooling system really implies equal sharing of resources), is £25,211 (assuming they are partners; or £26,976 otherwise), way more than their current £18,855. So, unless Praveena takes more than half of that income for her personal spending, she is still worse off than before, but less so than if she had continued living on her own with her reduced salary.
5 marks
Question 2. Casper is in the process of paying £2000 for a three-week hiking expedition in the Karakoram Range. He has three main ways of paying for this and is considering what to do. The travel agency has offered him a loan that charges 20% APR. This can be paid back after 1 year, either as a lump-sum or by fixed monthly repayments. This third option is to use a credit card which would charge 15% APR over 2 years (with fixed monthly repayments).
2.1 Using the ‘Saving and Borrowing calculator’ on the DVD-ROM:
(a) Calculate and compare the monthly repayments and the total interest payments of:
- the loan offered by the travel company
- his credit card.
Table 2.1. The loans offers
The APR is the measure used to compare the cost of borrowing, so lowest cost is the credit card loan at 15% APR and it has the lowest total payment. The total interest costs of the loan is the highest for the Travel company with option to paid back as a lump-sum at 20% APR.
The monthly payments are highest for the Travel Company and lowest on the credit card where payments are being spread over a longer period. However, the first option with a lump-sum repayment has none monthly payments and the only one payment is necessary after one year.
Good 4 marks
(b) Compare the total interest paid under both of the options from the travel company. Explain why they are different.
The total interest paid under the first option with a lump-sum to pay back from the travel company is different and that difference is due to a different flexibility of both loans.
If £2000 is borrowed and no repayments of this principal sum are made during the year, and the interest rate is 20 per cent p.a. with interest being paid once a year at the end of the year, the interest charge for that year is £400 (Upton 2006).
A fixed rate is determinated at the start of the loan and the interest charged is calculated average balance of the principal outstanding and this is the reason for what that option is not so expensive for a lender. Although the monthly charge is higher per month for a shorter loan, the total cost of repayment is less.
A fair attempt. The one-off payment of the loan from the travel company yields an interest of £400 (20% of £2,000). In total, the repayment will be higher than with monthly repayments (2,400 versus 2,204.52). This is because with monthly repayment, the amount of outstanding debt is reduced every month, which then reduces the compound interest charged on the remainder.
3 marks
(c) To help Casper decide which to use, explain one advantage and one disadvantage of each of the three options.
The Travel Company whith an offer a loan with a lump-sum to pay back have no repayments during the year what is really convenience. However, that option has a very high total interest of payments.
The Travel Company have another option with fixed monthly repayments of loan, which have a low total interest of payments. However, that option includes a high APR rate, what means that is expencive.
The last proposition of loan is the Credit card, which have longer and more flexible repayment period that can reduce monthly payments, but longer repayment periods can increase the total amount repaid.
2 marks
2.2 Casper is considering paying for the holiday using £650 he has in a bank savings account, which is currently earning 1% interest after tax. For the remainder of the money he could use his overdraft facility which charges interest at a fixed 9% APR.
(a) Outline one advantage and one disadvantage of Casper using his savings at the bank to help pay for the trip.
The advantage of Casper’s using his savings at the bank is fact that Casper does not have to use his overdraft facilities to help pay for the trip and that way he would save more money. However, the disadvantage would be fact that Casper will use his savings and would not leave any to cover unexpected events in the nearest future.
The right idea but not expressed in a well-focused and clear way. The main advantage of drawing on savings is that it will often be cheaper than borrowing. A disadvantage is that it reduces a financial cushion that can help Casper deal with unexpected spending. 1 mark
(b) If Casper repays the overdraft at £95.00 per month, calculate how long it would take him to pay his overdraft and the total amount of interest he would pay.
It will take the eight months to pay off the debt in full. Total interest paid will be £18,97, so Casper has to paid back £668,97.
If he decides to use his savings, the remainder (£1350) from his overdraft will be paid. This means it will take him at least 1 year and 4 months to pay off the debt with monthly repayments of £95. The total interest paid will be £1429.38 - £1350 = £79.38. 2 marks
2.3 Explain how a high annual inflation rate might influence how Casper pays for his holiday.
High inflation causes increase in interest rates on loans and installment debt is repaid. With inflation increases the real value of the installments to be regulated at the beginning of the cycle of loan repayments. At zero inflation, higher interest payments also include part of protecting the banks from losing the real value of borrowed funds. This part is all the greater, the higher the inflation.
Earnings per savings account is a moderate profit, slightly above inflation. If Casper want to saving account did its job of deposit interest, the rate should exceed inflation. In Casper’s case it does not, so in the worst case he will lost £6,50 per annum.
The high annual inflation rate means that Casper’s holidays will be much expensive if he will decide to use his overdraft facilities or even if he would use his savings resources.
Some relevant points.
Inflation will reduce the real cost of borrowing for those loans that require fixed monthly repayments. Although fixed across the period, their value will be reduced relative to other current payments (general household purchases, etc.). On the other hand, inflation erodes the value of savings if interest rates are fixed through the same process (your income or assets are worth less – you need more of it to pay for the same goods and services). So in real terms, borrowing becomes cheaper while keeping savings may not be as worthwhile. This may affect the choice of loan towards a longer period of fixed repayments computed on today’s nominal rate (credit card). Or it would also imply savers to spend their savings quickly, either in consumption or by converting them to more attractive financial products (index-linked savings or shares, etc.).
5 marks
Part A: 32 marks
Part A word count - 798 words
Part B
Read the extract, ‘Fee rise ‘’will not stop demand for university places’’’. This is adapted from a BBC article on the Browne report, which discusses the increase in higher education tuition fees.
Summarise the issues raised in the article and discuss the costs and benefits of higher education over male and female graduates’ life-course.
The process of liberalisation has accompanied by changes to financial support in higher education system under both Conservative and Labour governments. The Education correspondent adapted from a BBC article recognises many complex issues in increasing tuitions fees. The case study is the consequences of fee rise for an applicants and students, which now have to take out large loans to finance their studies.
The first issue is what group of young people would be deterred from applying. The NUS president says that fees have always unfairly impacted those from poorer backgrounds (Coughlan (2010)). There is a serious gap in setting fees, as many young people are automatically excluded [automatically excluded?] from applying. The report has confirmed that if universities will charge £7,000 per year, then 14 per cent of poorer students would not apply, compared with 9 per cent of better-off teenagers.
Another reason that discourages young people to study is the level of student loans collected and its long period of repayment. The debts of new graduates have been rising, and it was estimated that UK university students who graduated in summer 2004 had an average debt of £13,500, a 12 per cent increase in just one year (Brown (2006)). Students taking out loans to finance their studies have to bear the risk that increased earnings might not compensate their indebtedness in the future. However, as Richard says from the report, ‘the payments are so small compared to the rest of my monthly cost that I sometimes forget I am making them’ (Coughlan (2010)).Important to introduce the debt dimension, as you have done.
Everything depends on the potency of the financial planning, for instance, a household with the member who intends to go to university, might plan to finance current levels of expenditure trough taking out debts and then use the benefit of the graduate earnings premium to pay these debts off after graduation. Financial planning is one of the themes of the course – so it is good that you have introduced it though you could develop the idea further.
‘Students still expect their degree to translate into higher earnings’, says Emma from report (Coughlan (2010)). People invest time and money on education and training to increase their skills and knowledge and that improves their performance, which is then rewarded in the labour market trough higher pay (The Table 1.1):
Table 1.1 Employment rate and gross weekly earnings: by highest qualification in the UK, spring 2003
Source: Chapter 2 Income, in Personal Finance (LSC report, 2005)
Good to introduced relevant tables – and to source them. Well done.
A report from DfES concluded that graduates could expect to receive £120,000 more in the labour market over a lifetime than someone going into work with two A levels. Retaking exams to achieve five GCSEs at grade A-C can also increase a person’s earning power by 9 per cent on average (Callaghan (2006)).
Many good points introduced above. To recap on some of the main themes of the BBS report:
- The unequal impact of rising tuition fees on accessibility of higher education by income level, module type and university
- The value for money debate about the correspondence of the fees and the quality of the teaching experience
- The possibility of repayment of the debt in the future according to the type of studies (longer studies are more expensive and do not necessarily lead to higher incomes – example of architecture)
There is also evidence that the subject studied at university has an effect on the level of financial return. The Figure 1.1 shows that those who took an arts degree earn about 20 per cent less than law, social sciences, engineering, business studies or education graduates. The most expensive degree subjects, such as medicine or law, comes with the highest gross additional lifetime, and those courses are the most difficult to gain financially.
Figure 1.1 Gross additional lifetime earnings by degree subject compared to two or more GCE A-levels: Pooled labour force survey 2000-2005
Source: Research Report: The Economic Benefits of a degree (2007)
Yes – a relevant graph and correctly sourced.
All the evidence suggests that the jobs market for graduates is split along age and gender lines, with the graduate earnings premium for women growing for only ten years after graduation as opposed to fifteen years for men.
The financial benefit of completing a degree is greatest for men from lower socioeconomic groupings and families with relatively lower family income. Family resources and socio-economic grouping play less of a role in determining the economic returns to higher education for women. Irrespective of the subject of study, the financial benefit of completing a degree is much greater for women than for men, but this may be due to the relatively low earnings of non-graduate women.
The findings confirm that women tend to receive smaller financial improvements in pay from educational qualifications than men do, such as with the smaller graduate earnings premium. (Callaghan (2010)). Women are also more likely to be paid part time, as they expect to take time out of the labour market for caring responsibilities and women accumulate less human capital. This result is relatively more women are in lower skilled and lower paid jobs, such as: catering, cleaning, caring and cash registers. Many women who give up employment or work part-time when their children are small never return to full-time employment. The 5.2 million women who work part time make up approximately 81 per cent of the part-time workforce (Callaghan (2006)). The gender dimension is an important one which you discuss well.
In segmented labour market theory over time certain types of work have become seen as men work and others as women’s work and consequently they are paid differently because men’s work is seen as more important. Pay differences may also be the result of choices, such as the number of hours worked and type of subject studied at school or university, which are also influenced by gender (Callaghan (2010)). The income difference between men and women has reduced since 1996/97 mainly due to increase employment for lone mothers and the introduction of tax credit, which have been particularly beneficial for low earning of lone parents, most of whom are mothers (Electronic tutorial 2 (2006)). The Table 1.2 shows the income differences by sex:
Table 1.2 Median net individual income: by sex and family type (2003-04)
Source: DVD-Rom
The message from the report is clear. Taking a degree remains an attractive personal investment that will produce significant long-term financial gains and many other benefits over a working lifetime for the individual graduate. Those who leave education without good GCSEs can expect to earn £16,739 whereas a young person with FE qualifications can earn on average £20,692 a year (Callaghan (2010)). The benefits of obtaining the degree are significant. However, they are associated with the costs according to the interests, or the financial possibilities of applicants. Graduate earnings premium
The report confirms as well that fee rise will not stop demand for university places. With 90 percent of applicants declared themselves that they still will apply. This is a proof of that young people appreciate the value of a degree, says vice-chancellor of Leicester University, (Coughlan (2010)) and thus increase in expenses has its advantages.
A further development of the debate between individual costs/benefits and societal costs/benefits would be beneficial. For example, Graham from Sussex points to the fact that “We all benefit from an educated society and workforce and so we should make a major contribution”. On the one hand, some argue that because students will benefit from a graduate earning premium over their life-module (p. 64), it is only fair that they have to pay for their education. On the other hand, others, like Graham, argue that more people in higher education is beneficial for the society as a whole, and therefore society as a whole could contribute to the system, through general taxation for example.
Part B word count: 973 words
References
Brown, V., (2006) ‘UK university students who graduated in summer 2004 had an average debt of £13,500, a 12 per cent increase in just one year’, 'Personal finance: setting the context', in Callagham, G., Fribbance, I., and Higginson, M., (eds) (2006) Personal Finance, Chichester, John Wiley/The Open University, p.15.
Brown, V., (2006) 'Personal finance: setting the context', in Callagham, G., Fribbance, I., and Higginson, M., (eds) (2006) Personal Finance, Chichester, John Wiley/The Open University, p.15.
Callaghan, G., (2006) ‘Income’, in Callagham, G., Fribbance, I., and Higginson, M., (eds) (2006) Personal Finance, Chichester, John Wiley/The Open University, pp.63-66.
Coughlan S. (2010) ‘Fee rise ‘will not stop demand for university places’’, Education correspondent, BBC News, in The Open University (2011) ‘DB123 you and your money: personal finance in context’, Assignment and End-of-Module Assessment Booklet, The Open University, pp. 17-18.
Coughlan S. (2010) ‘fees have always unfairly impacted those from poorer backgrounds’, ‘Fee rise ‘will not stop demand for university places’’, Education correspondent, BBC News, in The Open University (2011) ‘DB123 you and your money: personal finance in context’, Assignment and End-of-Module Assessment Booklet, The Open University, p.17.
Coughlan S. (2010) ‘Students still expect their degree to translate into higher earnings’,‘Fee rise ‘will not stop demand for university places’’, Education correspondent, BBC News, in The Open University (2011) ‘DB123 you and your money: personal finance in context’, Assignment and End-of-Module Assessment Booklet, The Open University, p.18.
Coughlan S. (2010) ‘the payments are so small compared to the rest of my monthly cost that I sometimes forget I am making them’ ‘Fee rise ‘will not stop demand for university places’’, Education correspondent, BBC News, in The Open University (2011) ‘DB123 you and your money: personal finance in context’, Assignment and End-of-Module Assessment Booklet, The Open University, p.18.
Research Report (2007) The Economic Benefits of a degree [online], (Accessed 21 June 1011).
The Open University (2006) DB123 You and Your Money: Personal Finance in Context, DVD, electronic tutorials 2-4, Milton Keynes/The Open University.
Upton, M., (2006) ‘Debt’ in Callagham, G., Fribbance, I., and Higginson, M., (eds) (2006) Personal Finance, Chichester, John Wiley/The Open University, pp. 145-154
Good referencing. You have presumably studied Section 7.4 of the Course and Study Guide and additional information can be found at . Please keep well-focused oin the importance of accurate referencing.
Please offer some self-evaluation on TMA03.
In general, a good essay which addresses most issues in a coherent and well-argued way. Part B: 40 marks
