Student finance... sorted by Martin Lewis
It’s the start of a new university year, and many students have bags packed and are ready to head off. Yet it’s a year of big change for student finance, and as always many students and their parents are confused by mixed messaging. So our Money Saving Expert Martin Lewis is here to answer some of your most common questions…
Student loans vary in different countries in the UK. Here we focus on English loans for English students, in the rest of the UK, both the living loans and tuition fee loans vary depending on where you’re from and going to study.
Q. How much should parents give their children to go to university?
Tuition fees are paid for students by the Students Loan Company and are repaid only if they earn enough afterwards. The real problem though is the living costs.
Students are eligible for a loan for living – known as the maintenance loan – and it is again repaid after university if you earn enough.
Yet for most under 25s, even though they are old enough to vote, get married, join the army and more, the amount of their living loan is dependent on parental household income. From £25,000 family income upwards, the loan is reduced until it’s roughly halved at £60,000. And it’s unsaid but the expectation is parents are meant to make up the difference, this is known as the ‘parental contribution’.
There are three really big points to note here too:
1. Parents aren’t told they need to contribute.So many parents and students I come across are totally surprised when they hear that there is an official amount they’re meant to contribute. So much so today I wrote to the Universities Minister Jo Johnson, on the back of this to ask that in the entitlement letter it lays it out plainly, saying something like…
“Students – your loan for living is £x,xxx a year, this is less than the full loan and we expect your parents to make up at least the £x,xxx difference.”
This should help stop family friction. Until that happens, to work it out yourself, simply take the loan you’re getting and subtract it from the maximum amount available. For example a student living away from home studying outside London the most you could get from the government is £8,200. Yet if you have a household income of £40,000 you’d get £6,434, so the minimum expected parental contribution is £1,766. See Martin’s ‘How much parents should contribute ready reckoners’ blog for full help in working it out in lots of circumstances.
2. The parental contribution has increased by 27% this year.Last year only 35% of the loan was means tested, this year it’s up to 56% (depending on circumstances) – a huge rise. If you combine this with the fact loans have increased slightly, many parents will be asked to pay £100s more than they would in a similar situation last year.
3. Even adding the parental contribution on top it may not be enough.Contrary to what you hear often, the biggest practical problem for most students is the loan isn’t big enough – even with the parental contribution included it’s a struggle to meet necessities. This means that more money and working will often be necessary too.
Q. How do you actually repay student loans?
All new English undergraduate students staring university now get a guaranteed tuition fee loan of up to £9,000 each year, which is paid direct to the university. On top of this they also get a living loan part of which is guaranteed and part depends on your household income, as explained above.
Then…
You repay both these loans once you've left uni, but only if you earn £21,000 or more. If you earn below this you don’t repay a penny.
You then repay 9% of everything above £21k, regardless of how much you borrowed. The more you earn, the more you repay monthly.
The loan's wiped after 30 years – whether you’ve paid a penny or not – most people will be repaying for the full 30 years. In fact only those on a starting salary of around £40,000 will fully repay their loan plus the interest in this time.
It is repaid through the payroll, just like tax
The loan doesn't go on your credit file
Interest is added to the loan at inflation + 3% while studying, and between inflation and inflation + 3% afterwards, depending on what you earn. Though you would only actually repay this if you earn enough afterwards to clear what you borrowed in full.
Q. Is it true debts will be £50,000 after three years?
For someone on the full living loan and tuition fees that is in the right ball park. It is also mostly irrelevant. It actually doesn’t matter how much you borrow or what the interest rate on it is. What you repay is always the same.Because you only repay 9% of everything you earn above £21,000, and repay it for 30 years, before it wipes, so borrowing more doesn’t cost a difference. In fact unless you’re a higher earner (starting salary of £40,000 plus and then get big over inflation pay rises after) just ignore the number on the statement as you’ll likely be paying it for 30 years anyway.
In truth it’s much easier to get the real feel of the cost of the loan if you assess it as a tax (one that stops if you repay it).
So like everyone you can earn up to £11,000 without paying tax.From £11,000 to £21,000 you pay 20% income tax.For earnings above £21,000 you pay 29% income tax, those who haven’t gone to uni pay 20%.For earnings above £43,000 you pay 49% income tax, those who haven’t gone to uni pay 40%.For earnings above £150,000 you pay 54% income tax, those who haven’t gone to uni pay 45%.
It’s one reason I campaign to have it renamed a ‘graduate contribution’ instead of a loan, as it’s called in other countries. Calling it a loan is dangerous, it means our young people are educated into a ‘debt’ and then end up getting other types of much worse borrowing too.
Overall with student finance, the more you earn, the more you repay.
Q. Can the rules change?
Sadly and annoyingly yes. In 2012 when the new system launched, the government said that from April 2017, the amount at which people start to repay (that £21,000 figure) would start to rise in line with average earnings.
Yet in 2016 the government announced it would not do this – that the threshold would be frozen at £21,000. This means students will pay more than they were told both each year, and for most in total over 30 years too – it can add thousands.
Again I’ve campaigned actively on this, written to the PM, met the Uni’s minister, even threatened legal action as I believe no commercial lender could renege like this so why can the government. So far to no avail, though I haven’t given in.
Yet, it does threaten the faith you can have in the system, if the government will backtrack even after you’ve signed the contract.