Image to represent student loans

 by Martin Lewis
, posted On 30 Aug '18
 Martin Lewis, MoneySavingExpert.com

5 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).

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 another warning before I start. There was a radical change to student finance in England in 2012, anyone who started uni before that is on a different system, so beware their student finance war stories, which may not apply to you.

1. The student loan price tag is up to £50,000, 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, 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 £50,000. 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 £25,000+ a 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. The loan is reduced from a family income of just £25,000 upwards, until at around £60,000, 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 wrote to the government asking them to change that – it refused.

So when you get your letter saying what living loan you get, you’ll need to work out the parental contribution yourself. Subtract your loan from the maximum loan available (eg for 2018 starters it’s £7,324 if living at home, £8,700 away from home, and £11,354 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, ie for now 9% of everything earnt above £25,000.

In other words the amount you owe and the interest is mostly irrelevant. As proof, for a graduate who earns £30,000…

- Owe £20,000 and you repay £450 a year

- Owe £50,000 and you repay £450 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 £450 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 20% highest-earning graduates – will clear it in time. 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 a 9% increased rate of tax for 30 years. At current rates, it works like this:

Tax Table
Earnings Uni goers Non-uni goers
Up to £11,850 No tax No tax
From £11,850 - £25,000 20% 20%
From £25,000 - £46,350 29% 20%
From £46,350 - £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 6.3%, 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%, so from September 2018 it’ll be 6.3%

From the April after leaving: It depends on earnings. For those earning under £25,000 it’s RPI, for those earning over £41,000 it’s RPI + 3%. For those who earn in between it’s a sliding scale.

So many graduates aren’t actually charged the full 6.3% 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.

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’.

This is just the start, if you’d like to read my full 21 student finance mythbusters go to https://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes



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