Five things EVERYONE should know about student finance

Martin Lewis
Martin Lewis
25 July 2022

Ignore what 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).

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 be careful listening to past student's tales, how student finance works depends on when they started and where in the UK they studied.

This is about the system for English students who started in or after 2012

Don't assume student finance is the same for everyone, it's important to understand which system you are on.

- This blog is for those who start university in/from September 2022 in England. Though these are the same rules as they are for anyone who started in England since 2012.
- The rules change and costs increase for new starters from 2023. Those who start this year are the last on the current system, as there are big changes afoot for those starting in the following academic year. See Uni costs may double for new 2023 starters (however, to be very clear, if you start in 2022, you remain on the current system throughout your university life, you don't move to the new system).
- If you are from Scotland, Wales or Northern Ireland… please see my full Student loans mythbusting guide. In general, your loans are much smaller though.

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 frozen until 2025). 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 was long 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 family residual income, which for most people is a proxy for 'parental income'.

For 2022/23 starters, the loan received starts to be 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 effectively an unsaid parental contribution – as the only reason you get less is because your family earns more.

Yet parents weren't ever told about this gap, never mind told the amount. That will start to change this year, as after campaigning year after year, finally one Universities Minister listened, so now your correspondence will refer to it, though more work is needed on their official explanation.

In a nutshell though, to work out the parental contribution gap, either use our Parental Contribution Calculator or subtract the loan you receive from the full amount that a student with parents on the lowest income would receive. For 2022 starters, the full loan is:

- £8,171 if living at home.
- £9,706 away from home.
- £12,667 away from home in London.

The difference is the amount you have less to live on than what is deemed the minimum. 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 media often focuses 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 2022, it's 9% of everything earned above £27,295.

In other words, the amount you owe and the interest is mostly irrelevant. 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 around 20% of the 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, far from it, 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 (I'd call it a graduate contribution system).

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 7.3%, but many won't pay it

Student loan interest is set based on the Retail Prices Index (RPI) rate of inflation – the measure of how quickly prices of all things are rising. It changes annually each September based on the prior March's RPI.

Yet this year, as inflation is so high, the maximum interest was scheduled to be up to 12%, but the Government has capped the maximum interest at 7.3%, so interest charges are as follows...

- While studying: This year it is 7.3%.
- From the April after leaving: Normally it is a sliding scale between RPI and RPI + 3% depending on earnings. Yet as both of those are above the cap, this year it's just 7.3%.

But the interest added isn't what you actually repay. While many graduates may be charged the maximum 7.3% interest rate, some 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? 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.

And indeed this year we saw the Government freeze the current repayment threshold until 2025 – not as bad as the earlier attempt to drop the threshold – but it does mean people will repay more of their student loan than was previously planned, both each year and for most in total too. So sadly, all my explanations above need the caveat of 'unless things change'.

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

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