Martin's guide to student finances

It’s the first week of term for millions of university students in the UK, and hundreds of thousands more are starting their last year of school and preparing their university applications. Many are panicked about how on earth they’ll pay for university – but our Money Saving Expert Martin Lewis says ignore everything you’ve read and the political spittle that flies across parliament.

There are more myths and misunderstandings about student finance than any other subject, and as this is the week many students will be heading off to uni, it’s time to put the record straight.

Student loans vary in different countries across the UK. Today I’m focusing on English loans for English students who started in or after 2012. 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. And for those who started university before 2012, the system is very different.

This is just a quick briefing, for detailed and Q&A help see Martin’s full ‘20 student loan mythbusting’ guide.

1. The student loan price tag is over £50,000 for many, but that’s not what you pay.

Students don’t pay universities or other higher education institutions directly. Most first-time UK undergraduate students get their tuition fees, typically up to £9,250 a year, paid for you by the Student Loans Company. That means over a typical three-year course the combined loan for tuition and maintenance can be over £50,000.

But for most that’s irrelevant. 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 (rising to £25,725 next April). 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, so you don’t pay it yourself, and doesn’t go on your credit file.

2. The amount you borrow is mostly irrelevant – it works more like a tax.

For most the amount borrowed plus the interest is irrelevant, because the amount you repay a month is dictated solely by what you earn, i.e. 9% of everything you earn above £25,000.

Take this example for a graduate who earns £30,000…

- If your student loan is £20,000 you repay £450 a year- If your student loan is £50,000 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.

The only difference the amount you borrow (and the interest) makes is whether or not you clear it within the 30 years before it wipes. And unless you’re a seriously high earner in the top 20% of graduates, you won’t. So actually don’t let the psychology of (wrongly in my view) calling it a debt worry you.

The best way to think of it to get a real feel is a tax that stops after 30 years. Here’s how it works in reality…

I’m not saying this makes it cheap, just this is how to think about it. 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, in general, the more you earn, the more you repay.

3. Parents you are expected to contribute – but it’s hidden

Students 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.

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 now until September 2019 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 £45,000 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.

Q. Can the system change?

Yes it can. 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’.

Q. What about students in other parts of the UK?

- In Scotland, for Scottish students, there are no tuition fees, but you do get a maintenance loan and grant (depending on your household income and doesn’t need to be repaid). You repay 9% of everything above £18,330.

- In Wales, Welsh students can borrow up to £9,250 for tuition fees. You can also get a maintenance loan and a maintenance grant. You repay 9% of everything above £25,000.

- In Northern Ireland, Northern Irish students can borrow up to £4,160 for tuition fees (that’s the most uni’s in Northern Ireland charge). Plus there is a maintenance loan and grant available for living costs. You repay 9% of everything above £18,330.

For other combinations it differs, e.g. English students in Scotland do still pay the full £9,250 tuition fees and repay the English system of loans.