Fear grabs votes and makes headlines. Sadly, though, both sides’ political spin and spittle over student finance have resulted in widespread rampant misinformation – and it’s got worse again this year.
So with a new academic year about to start, my message to students and their parents is simple – forget the politics – ensure you understand the real impact on your pocket of going to uni.
Don’t confuse explaining the system with unblinkered support of it. I do have issues with the system. Yet the big issue – how much of the cost of higher education should be paid by the state (ie, taxpayers or through Government borrowing), and how much by the individual benefiting from the education – is political, not financial.
Yet that isn’t my aim here. I simply want to tool people up to make appropriate decisions. As finance differs across the home nations, I’m going to focus on the most common (and costly) system, English loans for English students who started in or after 2012 (see how it works elsewhere in the UK).
I should point out this is my summary blog – if you’ve got an appetite to understand it in detail, do read my full 20+ Student Loan Mythbusters guide.
1. Student loans’ price tag is up to £50,000, but that’s not what you pay.
Students don’t pay universities directly. Tuition fees, typically up to £9,250 a year, are paid for them by the Student Loans Company. Over a typical three-year course the combined loan for fees and living costs can be up to £50,000. Yet what counts is what you repay…
– You only repay once you’ve left uni and earn £21,000+/yr. Earn less & you don’t repay.
– You repay 9% of earnings over £21,000, so earn more & 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.
For full info on this see the full how you repay info in the 20 student mythbusters guide.
2. There is an official amount parents are meant to contribute, but it’s hidden.
The student loan doesn’t just pay for tuition fees, it also includes a living loan (officially called the maintenance loan) paid directly to the student to help with living costs.
Yet for most under-25s, even though they are old enough to vote, get married and fight for our country, their amount of their living loan is dependent on household (in other words parents’) residual income.
From just £25,000 family income upwards, the loan is reduced, until for those earning around £60,000 and above, it’s roughly halved.
This missing amount is the expected parental contribution. Yet parents aren’t told that, never mind told the amount. I wrote to the Government asking it to start to do so – it refused.
So work it out yourself. The maximum living loan for this year’s NEW starters is £7,097 if living at home, £8,430 away from home, and £11,002 away from home in London. Subtract the amount of the living loan you get from this to find the amount parents are expected to contribute. See the maximum loans for ongoing students.
That doesn’t mean parents can afford it – but at least you’re aware of the gap – and students should at least make sure they have the discussion with parents.
But even the max may not be enough to live on. Bizarrely the biggest practical problem with student loans isn’t that they’re too big, it’s that they’re not big enough.
3. 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 £25,000. As proof, take £31,000 earnings, as it’s easy maths…
– Owe £20,000: you repay £900/yr.
– Owe £50,000: you repay £900/yr.
– Owe £3,000,000 (if tuition fees were absurdly hiked to £1m a year): you repay £900/yr.
The only difference what you owe makes is whether you’ll clear the borrowing within the 30yrs before it wipes. The Institute for Fiscal Studies estimates only the HIGHEST-earning 23% of graduates will.
So unless you’re a seriously high earner, ignore the amount you ‘owe’. In practice you’re paying an increased rate of tax for 30 years. In fact, at current rates, it works like this:
Effective marginal tax rates 2017/18
|Up to £11,500||No tax||No tax|
|From £11,500 – £25,000||20%||20%|
|From £25,000 – £45,000||29%||20%|
|From £45,000 – £150,000||49%||40%|
This doesn’t make it cheap, but it does mean that all the talk of burdening students with debt is often misleading. Instead we’re burdening students with higher taxes over a certain amount, and they should decide if that’s worth it.
Remember, though, that just like tax, the ones who tend to pay more tend to earn more – so it’s to be hoped there is, financially at least, a ‘no win, no fee’ element here.
This is why I campaign to rename student loans to the far more descriptive ‘graduate contribution system’, as other countries call it. Calling it a loan is dangerous; it means our young people are educated into a ‘debt’ and then end up getting other types of much worse borrowing too.
4. Interest is added, and the headline rate is 6.1%, but many won’t pay it.
Student loan interest is set based on the rate of inflation – which measures how quickly prices are rising. The rate changes each September based on the Retail Prices Index measure the prior March (3.1% last March). The rate is set as follows…
– While studying: RPI + 3%, so this year it’s 6.1%.
– From the April after leaving uni: It depends on earnings. For those earning under £25,000 it’s RPI, for those earning over £45,000 it’s RPI + 3%. For those who earn in between it’s a sliding scale.
I’ve seen anger this year at “the Government hiking the rate” – that’s a little unfair, as the RPI rate changes each academic year with inflation, and that hasn’t changed – it works as it always has. For more details see past years’ rates.
Another confusion here is people talk about students paying 6.1% interest. That’s not correct – 6.1% is the amount added to the amount owed. And as explained already that doesn’t usually change what you repay.
The interest only has an impact if you’d clear what you borrowed initially in full over the 30 years – many won’t, and if so, student loans are, in practice, interest-free. And even of those who will, all but the highest earners won’t come close to repaying all the interest.
If you’re a graduate, and that’s getting you thinking, do read my full Should I repay my student loan now, as it’s accruing 6.1% interest guide.
5. The system can and has changed.
Student loan terms should be locked into law, so only an Act of Parliament can negatively change them once you’ve started uni – but, they’re not. So sadly my explanation needs the major caveat of ‘unless things change’.
This is especially true as we’ve seen a very poor change this year (that I’ve been ranting against, sadly to no avail). It was promised the £21,000 repayment threshold would start increasing with average earnings, but it’s been frozen until 2021. The effect of that is recent graduates are repaying more each month than they were promised when they started. See more on the campaign to stop the threshold freezing.
The practical impact of this isn’t enormous in the grand scheme of things, but the unfairness is. However, you can’t second-guess future changes (as we don’t know who’ll be future Governments) and we have to hope in future it’ll be respected. See more on if changes are likely.
If you hear any student, prospective student or parent panicking about student finance, and worried about the ‘horrid debt’, do feel free to point them in the direction of this blog.
STILL GOT QUESTIONS? Do read the full 20+ Student Loan Mythbusters guide.