Martin Lewis: Don’t be put off by the scare stores, student finance is not just debt

Summer’s here, and across the UK, universities are opening their doors to sell their wares to a new batch of prospective students. The problem is many are scared off wrongly by the rather meaningless price tag – the “£50,000 of debt” others in the media like to shriek about.

A graduation ceremony at Leeds Trinity University

For those attending summer open days, on the surface things have got even worse, as the Chancellor announced in the budget student grants will be cut when they start in 2016.

Yet throw away your preconceptions. Student finance is an entirely different beast to any other, so all is not as it first appears. Let me explain.

Sign up to our Business newsletter

Sign up to our Business newsletter

How do student loans work in practice?

It tends to be parents more than prospective students who panic about large debts from going to university – some even make the huge mistake of remortgaging houses to prevent their children paying fees.

Yet much of this worry is unnecessary. In fact, I would argue that these aren’t really loans at all – in reality they work more like an additional tax. I think the whole system would be better if we renamed it a “graduate contribution” – that’s what other countries call it.

In fact, when you read this try replacing “student loan” in your head with “graduate contribution” and it may help it make sense. If you want a more detailed explanation, go to www.mse.me/studentloans

1 You don’t pay for university upfront. Fees, which for most full-time English students are £9,000 a year, are paid for you and you also get money for living costs.

2 You repay this loan once you’ve left, but only if you earn £21,000 or more.

3 You repay 9 per cent of everything you earn above £21k. So that means the more you earn, the more you repay monthly.

4 The loan’s wiped after 30 years – whether you’ve paid a penny or not. When you do the maths it works out that many people will be repaying for the whole 30 years.

5 The loan doesn’t go on your credit file.

6 Employers take the repayments out of your salary before you get it, just like income tax, so no one is chasing you for the money.

7 Interest is added to the loan at inflation + 3 per cent while studying, and between inflation and inflation + 3 per cent afterwards, depending on what you earn. Though only those who pay enough to clear what you borrowed in full over the 30 years actually pay it (which is less people than you think).

Financially at least, the system is “no win, no fee”. If you don’t earn enough you don’t have to repay it, if you do, you pay a lot. So that £50,000 debt figure is mostly meaningless – low earners won’t ever pay close to that in real terms, high earners will pay a lot more (when you include the interest). See www.mse.me/studentcalc to see how much you’ll pay.

What are the changes to student grants?

Currently, if you come from a family with income under £42,620, some of the maintenance loan you get (money for living) is replaced by a non-repayable grant. If your family income’s under £25,000, you get the maximum grant, meaning £3,387 of your loan is replaced by a grant (though that still leaves an additional part as a loan).

For new students starting in September 2016 onwards, this grant’s scrapped (those who start university before then still get it), and all the amount you get is as a loan. This isn’t as bad as it sounds.

That’s because in practice you’ll only need to shell out more if you would’ve cleared the full tuition and living loan you got alongside the grant anyway, within the 30 years before it wiped. On my calculations, that’s those on starting salaries of way over £30,000, which rise above inflation after. In other words very high earning graduates – for everyone else while it sounds scary – it doesn’t cost you more.

Perhaps more importantly, the loan has actually been increased. This is useful as some struggle to cover basic living costs on the current amount. For example, the maximum loan for those living away from home outside London is currently £5,740/year, rising to £8,200/year under the new system.