Debt of £60,000 is enough to scare the pants of anyone. Indeed, it creates fear and dread in the homes of many young people considering university.
Yet for most, even though it’s called student loans, thinking of it as a debt is a nonsense, unrepresentative concept.
In fact, once at uni, many realise, the real problem is the ‘loan’ isn’t big enough.
While there is a legitimate political debate over how much of the cost of higher education should be paid for by the state and the individual, I won’t get into that. I just want to tool people on how the system works now, after all if you don’t understand the true cost, how can you decide, if it’s right for you.
I’ll lead on the biggest and costliest system – English loans for English students. Far more detail on this and the other UK nations is in my full Student Loan Mythbuster at mse.me/studentmythbuster.
1. The student loans’ price tag is up to £60,000, but that’s not what you pay.
Over a typical three-year course the combined English loan for tuition fees of up to £9,250 (which for first time UK undergrads is paid upfront by the Student Loan Company to the university) and living can be up to £60,000. Yet don’t confuse this price tag with the cost – what counts is what you repay…
- Both loans are lumped together and repaid as one.
- You then repay 9% of earnings over £27,295 (£25,000 in Scot and £19,895 in NI) once you’ve left uni. Earn less & you don’t repay.
- The loan is wiped after 30 years (25 years in NI) – 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.
2. The amount you borrow is mostly irrelevant – it works more like a tax.
What you repay each month depends solely on what you earn, ie, 9% of everything earned above £27,295. As proof, take £28,295 earnings – £1,000 above the threshold – as it’s easy maths…
- Owe £20,000: you repay £90/yr
- Owe £50,000: you repay £90/yr
- Owe £3,000,000 (if tuition fees were absurdly hiked to £1m a year): you repay £90/yr
The only difference what you owe makes is whether you’ll clear the borrowing within the 30yrs before it wipes. And the prediction is 83% of English students won’t clear their loan in that time, so for them the debt level is irrelevant – it’s just like paying 9% extra tax above that threshold for 30 years.
I’m not saying it is cheap. Higher earns can pay back many times what they borrow, lower earners won’t repay at all – so financially, this is a ‘no win, no fee’ system. The big message though is the common fear of debt ‘hanging over me’ doesn’t make sense.
That’s why I’ve long been campaigning to rename student loans to the far more descriptive ‘graduate contribution system’.
3. There is an official amount parents are meant to contribute, but it’s hidden.
Students get a maintenance loan to cover living costs. For most under-25s – though they’re old enough to vote, get married and fight for our country – the amount is dependent on household income – for most a proxy for parents income.
In England the loan starts reducing with household income of just £25,000, until for those earning around £60,000-£70,000 and above, it’s roughly halved. This difference is what I define as the expected parental contribution – after all it’s been reduced due to their income. Yet parents aren’t told. I’ve met various ministers and asked them to improve this – so far none have done it.
To help, instead we’ve built ‘a how much do you need to save calculator’ at www.moneysavingexpert.com/students/student-loan-parental-contribution-tool/ which calculates it for you.
For example for someone with £50,000 household income in England, with a student living away from home, the loan received is £6,092/yr, which is £3,396 less than the full loan – so that’s the parental contribution.
Those whose parents can’t or won’t make up the gap will therefore be living on less than the state assumes they’ll have – and that can be hard – especially as even the full loan may be a struggle for some to live off.
PS Bizarrely the income assessment is based on income two years ago. So, for the 2021/22 academic year, it’s the 2019/20 tax year. Clearly for many whose finances are pandemic hit, that’s an issue, so if you think your 2021/22 tax-year income is likely to be more than 15% lower, you can ask for a ‘current year assessment’.
4. Interest is added to the headline rate at 5.6%, but many won’t pay it.
The interest rate on student loans is based on inflation, and changes each September based on the Retail Prices Index measure the prior March (2.6% March 2020). The current rate is set as follows…
- While studying: Inflation (RPI) + 3%, so currently it’s 5.6%.
- From the April after leaving uni: It depends on earnings. Those earning under £27,295 it’s inflation, for those earning over £49,130 it’s inflation + 3%. In between it’s a sliding scale.
Yet the only people who pay all the interest added are the minority who clear the loan within the 30 years. The rest pay less, and a decent chunk of middle or lower earners you won’t actually pay any interest at all as you didn’t repay enough to clear the initial borrowing.
5. The system can and has changed.
What counts is not whether it’ll be changed for future students, but whether it’ll change for you once you’ve already signed up. The general rule is it doesn’t, but that isn’t impossible – the Government made a negative change in 2015 – I even hired lawyers to try and stop it – thankfully after a couple of years of campaigning it U-turned, but it’s worth being aware things could change in the future. Yet you can only make decisions based on what we know now.