When you talk to people about Student Finance, you’ll get different opinions and facts depending on who you speak to. When you’re deciding whether or not to go to University, don’t take advice from people who are in a different financial situation to you. You need to look at the facts and how it will practically affect your pocket. And that is radically different to what you usually hear.
- The student loan price tag can be £60,000, but that’s not what you pay.
Students don’t pay universities or other higher education institutions directly. Tuition fees, are typically up to £9,250 a year at the time of writing, are paid for you by the Student Loans Company. Over a typical three-year course the combined loan for tuition and maintenance can be over £60,000. But what counts is what you repay…
- You should only start repaying in the April after you’ve graduated from University.
- Then you only need to repay if you earn £27,295 a year (and that threshold is set to rise in April each year). Earn less than this amount and you don’t pay anything back.
- You repay 9% of everything earned above that amount, so earn more and you repay more each month.
- The loan is wiped after 30 years – whether you’ve paid a penny or not.
- It’s repaid via the payroll, just like tax and doesn’t go on your credit file.
- There is an official amount parents are meant to contribute, but it’s hidden.
You are also eligible for a loan to help with living costs – this is known as the maintenance loan. Yet for most under 25s, your living loan is dependent on your households (in other words, parents’) residual income. For 2021/22 starters, the loan is reduced from a family income of just £25,000 upwards, until around £61,000 (or £69,000 if you’re going to Uni in London), where it’s roughly halved. This missing amount is the expected parental contribution. Yet parents aren’t told about this gap, never mind told the amount, so if you fall into this category, be aware of how much parental contribution there will be and whether its financially feasible.
So for now, when you get your letter saying what living loan you get, you’ll need to work out the parental contribution yourself. To do this just subtract your loan from the maximum loan available.
Of course some parents won’t be able to afford it – and you can’t force them to pay. But at least being aware there is a gap helps you understand what level of funds are needed. And it’s important to have this conversation with your parents and discuss together how you are going to plug the hole.
In fact, while the papers often focus on tuition fees, I hear most complaints from students that even the maximum living loan isn’t big enough. Funny isn’t it, after everything that’s said, the real practical problem with student loans isn’t that they’re too big, it’s that they’re not big enough.
So when deciding where to study, look at all the costs, transport, accommodation (will you get into halls?), as that’s a key part of your decision. Think about which City would be most affordable and where you would be getting the most for your money.
- The amount you borrow is mostly irrelevant – it works more like a tax.
This bit is really important to understand, as frankly it turns the way you think about student loans on its head. So take your time (read it a couple of times if necessary).
What you repay each month depends solely on what you earn – from April 2021, it’s 9% of everything earned above £27,295.
In other words, the amount you owe and the interest is mostly irrelevant. As proof, for a graduate who earns, for the sake of easy numbers, £37,295…
- Owe £20,000 and you repay £900 a year.
- Owe £50,000 and you repay £900 a year.
- In fact, let’s be ridiculous and say tuition fees have been upped to £1m a year, so you owe £3m+, you still ONLY repay £900 a year.
So as you can see, what you owe DOESN’T impact what you repay each year. The only difference it makes is whether you’ll clear the borrowing within the 30 years before it wipes.
It’s predicted very few – only the top 17% highest-earning graduates – will clear it in time, so unless you’re likely to be a seriously high earner, ignore the amount you ‘owe’.
Instead in practice what happens is you effectively pay an extra 9% tax on your income (not including National Insurance) for 30 years. At current rates, it works like this:
|Earnings||Uni goers||Non-uni goers|
|Up to £12,570||No Tax||No Tax|
|From £12,571 – £27,295||20%||20%|
|From £27,296 – £50,270||29%||20%|
|From £50,271 – £150,000||49%||40%|
This doesn’t make student loans cheap, but it does mean that when you hear people say ‘students are burdened with student loan debt’ – that is misleading information. The burden is paying 9% extra tax – frankly it shouldn’t be called a debt, it really doesn’t work like one. In fact the word ‘debt’ is what seems scary about it and makes people think it’s an overbearing ever-growing mass of money.
The more you earn, the more you repay each month. So, financially at least, this is a ‘no win, no fee’ education.
- Interest is added, the headline rate is 4.5%, but many won’t pay it.
Student loan interest is set based on the (RPI) rate of inflation – the measure of how quickly prices of all things are rising and it changes annually each September, as follows…
While studying: RPI + 3%. From September 2021, it’s been 4.2% (due to a temporary rate cap; this will drop to 4.1% from October before the rate reverts to 4.5% in January).
From the April after leaving: It depends on earnings. From September 2021, for those earning under the repayment threshold it’s RPI (1.5% at the time of writing), rising on a sliding scale to RPI + 3% if you earn over £49,130.
So many graduates won’t actually be charged the full 4.5% rate. In fact many graduates won’t actually pay any interest at all.
That’s because the interest only has an impact if you’d clear your initial borrowing in full over the 30 years before its wiped. Many won’t. And even of those who will, all but the highest earners won’t come close to repaying all of the interest added.
- The system can and has changed.
Student loan terms should be locked into law – but they’re not. And a few years ago we saw a really bad change imposed, though thankfully after much campaigning it was overturned.
So these explanations about student loans are depend on the ever-changing rules, the government-commissioned ‘Augar’ report on further and higher education, published in 2019, proposed many big changes – including lowering tuition fees and changing the name of student loans to a ‘student contribution system’.
If these proposals, that are still very much open to question, do go ahead – they will probably only apply to new-starters, not for students always at uni.