Students will likely leave university with a significant amount of debt, but the consensus among finance experts is not to worry as the loan is unlike any other charge and many will never even pay back the money in full.
The student finance system differs around in the UK. Tuition fees are commonly around £9,000 a year(although arefree to most Scottish students studying in Scotland),and, of course,there’s living costs to factor in too.
With the average student rent costs coming in at £547 a month, according to website Save the Student, it’s no wonder graduates paying full tuition fees are walking away with tens of thousands worth of debt of debt.
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Students start repaying the loan when their income hits above a certain amount. The threshold changes on 6 April every year and will depend on the repayment plan they are on.From 6 April 2021, the repayment threshold is £19,895 for university leavers pre-2012 and £27,295 for those starting courses after 1 September 2012.
There are two types of repayment plans.These are called Plan 1 and Plan 2 and borrowers don’t have a choice which plan they follow as it depends on the year their course started.
Plan 1:
This covers English or Welsh students who started an undergraduate course anywhere in the UK before September 2012, and Scottish or Northern Irish students who started an undergraduate or postgraduate course anywhere in the UK from September 1998.
Repayments start when income hits £19,380 a year. Payments are 9 per cent on anything above this threshold.
Interest on the loan is currently 1.1 per cent.
The loan is wiped after 25 years (30 years in Scotland),or when you’re 65 if the loan was taken out pre-2006 for students in England, Wales and Northern Ireland, and pre-2007 for students in Scotland.
Plan 2:
Applies to English or Welsh students who started an undergraduate course anywhere in the UK from 1 September 2012.
Repayments start when income hits £26,568 a year. Payments are 9 per cent on income above this threshold. Someone with a starting salary of £30,000, for example, would pay around £26 a month this year.
The loan also accrues interest while students are still at university. The rate at the moment is 5.6 per cent.
After finishing university, the interest rate will depend on total income across the tax year. People earning £26,575 or less will be charged interest of 2.6 per cent. After this the interest rate gradually rises until it hits the maximum 5.6 per cent for anyone with an annual income above £47,835.For those who have not paid it off, the loan is wiped after 30 years.
Lana Eardley, 25, is an operations manager at marketing and PR company KC Communications.
She graduated this year with a first-class degree in travel and tourism management from the University of Huddersfield, and says the Covid-19 pandemic has not held her back.
“I am one of the few students that went through university without borrowing any money. I worked full-time as a front office manager at a hotel throughout my degree.
“Home originally for me is Stoke-on-Trent. I lived at home for the first three years of university before moving up to Huddersfield for my final year, where I lived in a shared house.
“I am hoping to buy a house close to my workplace in Lindley village, just outside Huddersfield town centre, within the next three years.
“I am using a Help to Buy Isa to save. I also have a private pension, and I am looking into investing in stocks and shares.
“I would say my attitude to money is a very sensible one. I do allow myself treats, of course, but I like to think I am reasonable. I saw too many of my classmates living a champagne lifestyle on a lemonade budget with £2,000 overdrafts, almost like it was ‘free money’.
“I can completely see the appeal – but I was always taught to work for my money and to save for what I want.”
The Institute for Fiscal Studies says three quarters of university leavers in England will never pay off their student loans, and that most will be repaying the loan and interest throughout their careers.
Many parents and students will question whether it’s worth overpaying on the loan or avoiding the loan altogether if they can afford to. The high interest payments for graduates on the plan 2 system are daunting. The total repayments end up significantly higher than the original loan taken out, were students to pay back the loan in full.
However, many finance experts urge graduates not to worry about the debt and say they should not prioritise paying it back.
Martin Lewis, the founder of Moneysavingexpert, says student finance should be viewed as an extra tax rather than a loan. Overpayments or early repayment are only worth it for those on plan 2 who borrowed a small amount or expect to become a high earner and would pay off their loan before it is wiped at the end of 30 years.
How much students could repay on plan 2 (example)
- Student loan: £50,000
- Starting salary: £30,000 (assumes inflation of 2% a year)
- Annual repayments: Start at £308
Total repayments over 30 years, when the loan is wiped: £37,781
- Student loan: £50,000
- Starting salary: £50,000 (assumes inflation of 2% a year)
- Annual repayments: Start at £2,108
Total repayments over 30 years, when the loan is wiped: £110,804
Student loans are not like any other form of debt. Repayments are kept at an affordable level and would stop were an individual to lose their job.
Unpaid student debt does not affect a person’s credit rating and borrowers cannot lose their home if loan repayments aren’t kept up (unlike secured debt such as a mortgage. The fact it is wiped at the end of a fixed term is also unique.
However, graduates should be aware that the 9 per cent deduction in earnings will be taken into account by lenders when assessing mortgage affordability.
Kay Ingram, director of public policy at financial group LEBC, adds: “Graduates who are not expecting a high-earning career would be better off to use their savings for other purposes such as paying off credit cards or saving for a home deposit or saving for retirement. Pension savings made into a workplace scheme or private pension reduce the income taken into account for the income threshold at which the student loan repayment becomes due, as well as earning income tax relief. Parents anxious to lend financial support to their student children should wait and see how their child’s income pattern develops before paying off student loans.”
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How parents can help
Set money aside and hold off making loan repayments until the child has finished university.
“A simple strategy is to put the cash aside in a cash Isa or savings account until after graduation. Then you’ll have a much better idea of earning potential, and whether you should pay off the loans there and then. Money used to pay off student loans could provide a substantial housing deposit,” says Martin Lewis.
Maike Currie, investment director at Fidelity International, adds that parents use their own Isa allowance (currently £20,000) and their child’s junior Isa (Jisa) allowance of £9,000 for the current tax year. Grandparents, relatives and friends can contribute too – so birthday and Christmas gifts could go straight into their Jisa.
Of course, the maintenance loan may not be enough to cover a student’s living expenses. The maximum maintenance loan this year is £9,203 for students studying outside London and not living with parents, and £12,010 for those studying in London.
But the full loan is only available to students coming from households where income is less than £25,000 a year. The loan reduces as household income rises and the Government assumes parents will top up the shortfall.
As an expert with a deep understanding of student finance and the intricacies of loan systems, I can provide comprehensive insights into the concepts mentioned in the article.
Student Finance System in the UK:
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Tuition Fees: In the UK, tuition fees are typically around £9,000 per year, although Scottish students studying in Scotland often enjoy free tuition. Living costs, including rent, contribute significantly to the overall student debt.
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Repayment Thresholds and Plans:
- Repayments start when the graduate's income surpasses a certain threshold, which changes annually. As of April 2021, the threshold is £19,895 for pre-2012 university leavers and £27,295 for post-2012 starters.
- There are two repayment plans: Plan 1 and Plan 2, depending on the year the course started. Plan 1 covers certain students from England, Wales, Scotland, and Northern Ireland who started before September 2012, while Plan 2 applies to those who started in or after September 2012.
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Interest Rates:
- For Plan 1, the interest on the loan is currently 1.1%, and the loan is wiped after 25 years (or 30 years in Scotland).
- For Plan 2, the interest rate varies, with a rate of 5.6% while studying and afterward depending on income, with the loan wiped after 30 years.
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Repayment Examples:
- Plan 1 repayment starts at £19,380 a year, with payments at 9% on income above this threshold.
- Plan 2 repayment starts at £26,568 a year, also with 9% payments on income above the threshold.
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Individual Experiences:
- Lana Eardley, a graduate without student debt, highlights the importance of working throughout the degree and maintaining a sensible approach to money.
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Advice from Financial Experts:
- Martin Lewis views student finance as an extra tax rather than a conventional loan, advising against prioritizing early repayment. Overpayments may be worthwhile only for Plan 2 borrowers expecting high earnings.
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Loan Repayment Scenarios:
- The article provides examples of how total repayments over 30 years can vary significantly based on the starting salary and inflation rate.
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Unique Features of Student Loans:
- Student loans differ from traditional debt; repayments are affordable, stop in case of job loss, and don't impact credit ratings. The loan is wiped after a fixed term.
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Impact on Mortgage Affordability:
- The 9% deduction in earnings for loan repayment is considered by lenders when assessing mortgage affordability.
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Parental Support and Financial Planning:
- The Institute for Fiscal Studies suggests that three-quarters of university leavers in England may never fully pay off their student loans.
- Parents are advised to hold off making loan repayments until after graduation, utilizing cash ISAs or savings accounts to assess the child's earning potential.
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Other Financial Considerations:
- Maike Currie suggests using parents' and child's ISA allowances for saving and investing in a Junior ISA (JISA).
- Parents are advised to wait and observe their child's income pattern before deciding to pay off student loans.
Understanding these concepts provides a comprehensive view of the student finance system in the UK and helps individuals make informed decisions regarding their education and financial future.
