It may seem daunting to take out such a large loan for your studies, but there are some useful things to know so you can make the most of student life
Student loans have become an essential way of enabling young people to pay for their studies at university, especially with the increase in tuition fees over the last decade. While loading yourself up with debt might seem like the last thing you want to do before you’ve even begun a career, the nature of student loans are different to traditional financing offered by banks.
Here are some useful tips about student loans and how they can be managed.
Your parents are expected to contribute
As well as a loan to pay tuition fees, you can also apply for a maintenance loan that can help with your living costs. For the 2018/19 academic year, someone living away from home outside London could borrow up to £8,700 to help towards living costs. However, the amount you can borrow is based on your parents’ income. From just £25,000 per year, the amount of this loan is reduced and it’s pretty much halved by the time household income reaches £60,000 per year. Parents are expected to make up the shortfall, but this isn’t mentioned explicitly.
It may be called a loan but it’s more like a tax
Over the course of a three year degree, you can rack up a large amount in student loans. While this can be worrying, it’s often easier to focus on how much you’re repaying rather than how much you owe. If you’re an English or Welsh student who started your undergraduate course before 1 September 2012, or you’re a Scottish or Northern Irish student, you’ll start repaying your student loan after you leave your course in April. This only applies if your income is over £352 a week or £1,527 a month (before tax and other deductions).
If you’re an English or Welsh student who started your undergraduate course on or after 1 September 2012, then the earliest you start repaying is when your income is over £480 a week or £2,083 a month (before tax and other deductions). This will occur in either:
Basically, you’ll pay 9% of everything you earn over this amount so the amount you pay every month remains the same, whether you owe £20,000 or £50,000. If you haven’t repaid the loan within 30 years then the residual amount will be written off. If you never earn more than £25,000 then you won’t pay a penny. According to the Institute for Fiscal Studies, only the highest earning 23% of graduates will clear their debt.
Student loans don’t go on your credit file
Student loan repayments are automatically deducted from your salary in the same way as tax, National Insurance contributions and pension contributions are. This means that you won’t be chased for non-payment. It also won’t appear on your credit report, so student debt can’t affect your overall credit score. However, mortgage lenders may ask for this data as part of any affordability calculations.
You can still apply for a maintenance loan if you’re aged over 60
It used to be the case that maintenance loans were only available to the under 60s. However, this has now changed and since 2016/17 students over the age of 60 are able to apply for loans to meet their living costs if they’re studying full time.
The interest can look scary
Student loan interest rates are based on the retail price index (RPI) - a measure of the price of goods and services in the UK - rate of inflation, and the amount of interest you pay depends on how much you earn. If you earn under £25,000, the interest rate you pay will be the RPI. This then increases up to the RPI plus 3% for people earning over £45,000 per year. So, in September 2018, students in England and Wales who started university in or after 2012 face a headline interest rate of up to 6.3%. This is higher than students who went to university earlier and higher than the rates you might see on other products, such as mortgages.
Another important factor is that while you’re studying, you’ll also be charged interest of the RPI plus 3%. Recently graduated students might get a nasty shock when they open their first statement and see a large chunk of interest added to what they’ve borrowed. While this may feel unnerving, it’s worth noting a couple of things.
First of all, while the interest rate does change over time, this won’t affect your monthly payments, which will only change as your salary increases. Secondly, while you may feel the need to make overpayments to clear the debt, remember that a lot of people will never get close to repaying their student loans – and, if you’re an English or Welsh student who started their course on or after 1 September 2012, these are usually written off if not repaid within 30 years.
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