Martin Lewis of Money Saving Expert: The five need-to-knows about student finance
This week, Martin Lewis talks us through the need-to-knows about student finance.
You've all heard the number - £60,000 of debt.
It's responsible for fear and dread in the homes of many young people who are considering going to university. Yet it's also mostly meaningless.
I've campaigned for years to explain that you must forget the headlines and realise student loans don't work how most people think.
Here's a brief five things you need to know:
1. The student loans price tag is up to £60,000, but that's not what you pay.
Over a typical three-year course the combined loan for fees and living costs can be up to £60,000, including typical tuition fees of up to £9,250. Yet don't confuse the price with the cost - what counts is what you repay.
- You repay 9% of earnings over £25,725 (increasing to £26,575+/yr from April 2020) once you've left uni. Earn less and you don't repay.
- The loan is wiped after 30 years - no matter what you've repaid.
- It's repaid via the payroll, so like tax it's taken before you get the money, and it doesn't go on your credit file.
2. The amount you borrow is mostly irrelevant - it works more like a tax.
What you repay depends on what you earn, ie, 9% of everything earned above £25,725.
The only difference what you owe makes is whether you'll clear the borrowing within the 30yrs before it wipes.
As it's predicted 83% of university leavers won't earn enough, for the majority it in effect works like paying 9% extra tax for 30 years.
That's doesn't mean it's cheap, just that it doesn't work like a debt - so the fear of debt hanging over you doesn't make sense.
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Like tax, the ones who tend to pay more tend to earn more - so it's to be hoped there is, financially at least, a 'no win, no fee' element here.
That's why I've campaigned to rename student loans to the more descriptive 'graduate contribution system'.
3. There is an official amount parents are meant to contribute, but it's hidden.
As well as tuition fee loans paid straight to the university, new students can take out a maintenance loan, which is paid to the student for living costs.
Yet for most under-25s - even though they're old enough to vote, get married and fight for our country - their maintenance loan is dependent on household (in other words parents') income.
From £25,000 family income upwards, the loan is reduced until for those earning around £61,000 and above, it's roughly halved.
This missing amount is the expected parental contribution. Yet parents aren't told that, never mind told the amount.
So work it out yourself. For new starters in the 2020/21 academic year, the maximum living loan will be roughly £7,750 if living at home, £9,200 away from home, and £12,000 away from home in London.
Subtract the amount of the living loan you get from this to find the amount parents are expected to contribute.
4. Interest is added to the headline rate at 5.4%, but many won't pay it.
The interest rate on student loans is based on inflation, and changes each September based on the Retail Prices Index measure the prior March (so for this academic year it is 2.4%). The rate is set as follows…
- While studying: RPI + 3%, so this year it's 5.4%.
- From the April after leaving uni: It depends on earnings. For those earning under £25,725 it's RPI, for those earning over £46,305 it's RPI + 3%. For those earning in between it's a sliding scale.
5. The system can and has changed.
What counts is not whether it'll be changed for future students, but whether it'll change for you once you've already signed up. Sadly there's a precedent for this, as the government made a negative change in 2015 - after a couple of years it u-turned, but it's worth being aware things could change in the future.
All I can do is explain how it works based on today's system.