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Why Student Loans Aren't Bad
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Why Student Loans Aren’t Bad

Written by Sam | December 26, 2019

Why Student Loans Aren’t Bad

Many see student loans as a negative thing. They say they will come out of University with £50,000 of debt and that they are going to have to repay it all.

Stop Focusing on The Price of University

While very loosely some of this sentence is correct, the majority of this is wrong!! The fees for University went up for any student that enrolled in 2012 and after, the fees went from roughly £3,000 up to £9,000. We shouldn’t look at the cost of University because as a standard ‘debt’ and here are the reasons why:

  • You’re technically borrowing from the government instead of a private business or person
  • After a certain period of time, the debt is written off
  • The debt is classed a student debt and doesn’t affect your credit score as much as other debts
  • The interest you pay is a lot less than private loans
  • You will not have the bailiffs at the door if you don’t earn enough to pay it back
  • You must earn a certain amount before you start paying it off

Please don’t think for an instance think we are saying that debt is good, if you borrow money which you can’t pay back there are consequences, especially when you borrow money from private lenders. There are big differences between a student loan and a private loan.

The price tag of the university is mostly irrelevant. What matters in practical terms is how much you have to repay – and that’s a completely separate number from the total amount of tuition fees, maintenance loan, and interest. What you repay solely depends on what you earn after university. In effect, this is (financially at least) a ‘no win, no fee’ education. Those who earn a lot after graduating or leaving university will repay a lot. Those who don’t gain too much financially from going to university will repay little or nothing.

With the new student financial loans, grants, and lendings, they expect parents to pick up a lot of the slack for their children’s living expenses now. This can make it tricky if you have more than one child at University.

You Don’t Need The Cash For University

When starting or thinking about starting University, you don’t need to worry about having the course fee money in your pocket. All you need to do is apply for University and if you get accepted, that’s when you get your loan. Once you have your loan for the course, you can then get a loan for your living expenses.

Full-time students only need to start repaying these loans at the earliest in April AFTER they graduate (or leave), no matter how long their course is.

Repayments

Once you leave university, you only repay when you’re earning above £2,144 a month (equivalent to £25,725 a year), and then it’s fixed at 9% of everything you earn above that. The salary threshold will be increasing to £26,575/yr from 6 April 2020. (NB for Scottish students, the threshold where repayments start is £18.935 in 2019/20).

Earnings mean any money from employment or self-employment and, in some cases, earnings from investment and savings.

If you’ve started repaying the loan, but then lose your job or take a pay cut, your repayments drop accordingly. Imagine:

  • If you earn £27,000 in a year, what do you repay? The answer is £115, as £27,000 is £1,275 above the threshold and 9% of £1,275 is £115.
  • And if you earn £35,000, what do you repay? The answer is £835. £35,000 is £9,275 above the threshold and 9% of that is £835.
  • ‘How on earth will my child be able to afford to repay these debts if they get a poorly paying job?’ This panicked question has been thrown at me by many parents – and it’s really important to examine it in the light of the required repayments. Someone on a low wage will be required to repay little or nothing at all. In fact, only higher earners will be shelling out large amounts. It’s important to note that not repaying much because you’re just over the threshold isn’t being bad. The system is, in reality, a graduate contribution, designed so that, in the main, those who gain the most financially out of university contribute the most.

30 Years Later

Currently, as it stands, after 30 years and any remaining debt is wiped from the record. To reiterate that point, if your debt goes over 30 years, it will be removed and you won’t have to pay it back!

High Earners & Paying Their Debt Off

By running the numbers on some typical situations using our Student Loan Calculator, only high earners look likely to repay all that they borrowed and the accumulated interest.

Many people earning over the £25,725 threshold (£26,575 from April 2020) will never pay back their student debt within the 30 years. And lower earners won’t repay very much at all.

So, for many people, what they borrow is irrelevant – they’ll just keep paying monthly until the debt is scrubbed after 30 years. This is one reason why talk of £50,000 debts is nonsense for most.

The rate you pay changes each September and uses the previous March’s RPI inflation rate.

As March 2019’s RPI inflation rate was 2.4% (down from 3.3% in March 2018), the interest charged from Sept 2019 is between 2.4% and 5.4%, depending on whether you’re studying or graduated, and how much you earn.

Part-Timers & Post-Grads Can Get Loans For Tuition Fees Too

Part-time students, makeup 40% of all undergraduates. Fees start at around £4,500 with a maximum of £6,935 in 2019/20 however, since 2012, for the first time, part-time students studying at least 25% of a full-time course have been eligible for tuition-fee Student Loans Company loans on exactly the same basis as full-time students.

And if your course starts on or after 1 August 2018, you are also eligible for maintenance loans or grants as well – although students over 60 years old don’t qualify.

Living Costs & Maintenance Loans

Full-time students at the start of their course can also take a loan to pay for their living costs, eg, food, books, accommodation, and travel. They are known as maintenance loans and are usually paid in three termly installments.

The loan is repaid in exactly the same way as the loan for tuition fees (ie, 9% of everything earned above £25,725).

Yet not all is quite as it seems here. This is because the maintenance loan is means-tested, and the means-tested proportion has increased over recent years from a third to over a half. For almost every student under 25, this means test is based on household income, which in practice means parents’ income.

The reduction starts with total family incomes of just £25,000 and is usually halved for those with earnings of around £61,000. However, it’s worth noting that if you’re eligible for benefits, or there are one or more financial dependants in your household or you’ve applied for supplementary support, your parents’ income’s assessed in a different way.

Read it all here: How you’re assessed and paid

To give you an example of some of the figure, see below:

  • Living at home: The minimum you can get is £3,314 of the maximum £7,529. The difference between what you get and the maximum, in this case, £4,215, is the expected parental contribution.
  • Living away from home, outside London: The minimum you can get is £4,168 of the maximum £8,944. The remaining £4,776 is the expected parental contribution.
  • Living away from home and studying in London: The minimum you can get is £5,812 of the maximum £11,672. The remaining £5,860 is the expected parental contribution.

Budgeting as Student

While most media outlets like to focus on the headline debt figures – in real terms the main issue most students face is that the loan isn’t big enough. The amount of money to live off can barely cover accommodation fees in some circumstances.

Therefore, it’s crucial to ensure there is a real focus on budgeting, and you don’t spend the cash the first few weeks of term. Part-time jobs, any grants, extra cash from parents will all help.

When making sure you have enough to live, please make sure that you are doing everything you can to give yourself the best possible chance.

Discover. Trust. Review.