Five things EVERYONE should know about student finance

Five things EVERYONE should know about student finance

Ignore everything you've read in the papers. Ignore the political spittle that flies across Parliament. And in some cases, ignore what parents tell you too. There are more myths and misunderstandings about student finance than any other subject (my polite way of saying there's a lot of bull spoken). So in this blog is my updated 2021/22 version of the must knows, with links to far more info.

Student finance

This is a political hot potato. People spin explanations to suit their own arguments. Yet that's about the big picture. When you come to decide whether you can afford to go to university, you should focus only on how it'll practically affect your pocket. And that is radically different to what you usually hear. 

Now please don't confuse the fact I want to explain the system, with unblinkered support of it. I do have issues, but frankly that's not relevant here. What counts is that I tool you up to make the appropriate decision. And a quick warning before I start – if people talk to you about their uni finances ask them where they went and when they started.  

This is about the system that began for English students who started in or after 2012. It can be very different for others. (For help across the UK see my full Student Loans Mythbusting guide.)

1. 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, 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 leave uni.
  • 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 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.

2. 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 – known as the maintenance loan. Yet for most under 25s, even though you are old enough to vote, get married and fight for our country; your living loan is dependent on household (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. I'm in the midst of talking to ministers to try and get them to change that, but nothing has happened yet.

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 – or even better, our parental contribution calculator will do it for you. (As an example, for all 2021/22 starters, it's £7,987 if living at home, £9,488 away from home, and £12,382 away from home in London).

Of course some parents won't be able to afford it – and you can't force them to pay. But at least knowing 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.

3. 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 (to pre-empt a question see my If most students won't repay – who pays? blog). 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%

£150,000+

54%

45%

This doesn't make it cheap, but it does mean that all the talk of burdening students with debt is misleading. The burden is paying 9% extra tax – frankly it shouldn't be called a debt, it really doesn't work like one. 

The more you earn, the more you repay each month. So, financially at least, this is a 'no win, no fee' education.

4.  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 it's 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. For far more on this see my Should I pay off my student loan as it's 4.5% 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. And a few years ago we saw a very bad change imposed, though thankfully after much campaigning it was overturned.

So sadly all my explanations above need the caveat of 'unless things change'. 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'.

Whether these proposals will be put in place is still very much open to question, yet if they are, the recommendation was it'd only be for new starters, not for those who are already at uni.

Hopefully that gets you started on student finance. If you'd like to read full info, see my detailed 20 Student Finance Mythbusters.

Other important student finance guides and blogs:

- Student budgeting and how to do it
- Best student bank accounts
- Video: Should you pay off your Plan 1 loan?
Big student loan shake-up means millions (but not everyone) will pay £1,000s less
- Should you overpay your student loan?
The five changes needed to improve the current student finance system
Why cutting tuition fees bizarrely risks hurting not helping most students
Warning: Parents with 2+ children who'll go to uni, SAVE NOW, the system's biased