You’ve all heard the number – £60,000 of debt!
It’s responsible for fear and dread in the homes of many young people who are considering going to university.
Yet it’s also mostly meaningless. I’ve campaigned for years to explain that you must forget the headlines and realise student loans don’t work how most people think.
This is crucial to understand, with 100,000s 17-18year olds (and some who are older too) working through whether they’re going to apply for university.
This huge ‘debt’ puts many off, especially those from non-university family backgrounds. I’ve also met parents so spooked by it that they intend to make terrible financial decisions.
Much of this is a result of student finance being a political football booted by all sides, as scaremongering headlines and rampant misinformation.
Yet don’t confuse explaining the system with unblinkered support of it.
There are issues – and there’s debate to be had over how much of the cost of higher education should be paid for by the state – but my focus is on tooling people up with enough knowledge to make an application decision.
Unless you understand the true cost, how can you decide?
As finance differs across the home nations, I’m going to focus on the most common and costly system, English loans for English students. If you’ve an outstanding student loan, remember this system changed in 2012, so if you started before that your system is different.
Here’s a brief five things you need to know. For more detail (and explanations for the rest of the UK) see my https://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 loan for fees and living costs can be up to £60,000, including typical tuition fees of up to £9,250.
Yet don’t confuse the price with the cost – what counts is what you repay…
You repay 9 per cent of earnings over £25,725 (increasing to £26,575+/yr from April 2020) once you’ve left uni. Earn less & you don’t repay.
The loan is wiped after 30 years – no matter what you’ve repaid.
It’s repaid via the payroll, so like tax it’s taken before you get the money, and it doesn’t go on your credit file.
2. The amount you borrow is mostly irrelevant – it works more like a tax.
What you repay depends on what you earn, ie, 9 per cent of everything earned above £25,725. As proof, take £26,725 earnings – £1,000 above the threshold (purely because 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 30 yrs before it wipes. As it’s predicted 83 per cent of university leavers won’t earn enough, for the majority it in effect works like paying 9 per cent extra tax for 30 years.
That’s doesn’t mean it’s cheap, just that it doesn’t work like a debt – so the fear of debt hanging over you doesn’t make sense. (To help, I recently filmed an easy step-by-step explainer for parents and potential students to watch together – available at mse.me/studentloansvid). 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. That’s why I’ve campaigned to rename student loans to the more descriptive ‘graduate contribution system’.
3. There is an official amount parents are meant to contribute, but it’s hidden.
As well as tuition fee loans paid straight to the university, new students can take out a maintenance loan, which is paid to the student for living costs.
Yet for most under-25s – even though they’re old enough to vote, get married and fight for our country – their maintenance loan is dependent on household (in other words parents’) income.
From £25,000 family income upwards, the loan is reduced until for those earning £61,000 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 do so – it refused.
So work it out yourself. For new starters in the 2020/21 academic year, the maximum living loan will be roughly £7,750 if living at home, £9,200 away from home, and £12,000 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. But even the maximum 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.
4. Interest is added to the headline rate at 5.4 per cent, 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 (so for this academic year it is 2.4 per cent). The rate is set as follows…
While studying: RPI + 3 per cent, so this year it’s 5.4 per cent.
From the April after leaving uni: It depends on earnings. For those earning under £25,725 it’s RPI, for those earning over £46,305 it’s RPI + 3 per cent. For those earning in between it’s a sliding scale.
But the interest only has an impact if you’d clear what you borrowed initially in full over the 30 years. If not you won’t repay all the interest added. For a decent chunk of mid-to-lower earners you won’t pay any interest at all, as you won’t repay even your 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 signed up. Sadly there’s a precedent for this, as the Government made a negative change in 2015 – after a couple of years it u-turned, but it’s worth being aware things could change in the future.
All I can do is explain how it works based on today’s system.