With A levels done and results coming in, itโs time for some families to start thinking about the cost of sending sons and daughters off to university.
A three-year undergraduate course may cost ยฃ9,250 per annum for tuition, and on average ยฃ5,268 per annum for accommodation, plus the cost of food, books travel and general living. It could easily add up to more than ยฃ20,000 per annum or more than ยฃ60,000 over 3 years, especially if they are studying in London.
Fortunately the costs can be covered by student loans.
Borrowing ยฃ60,000 before a young person even starts their career would normally be unwise, but student loans are a special case. Unlike most types of borrowing, repayment terms linked to the graduate's earnings. However, recent changes have challenged policymakers, parents and students themselves.
At Continuum we are looking at the details of student loans.
A special kind of loan
In the UK, student loans are administered by the Student Loans Company (SLC), a non-profit government-owned organisation. There are two main types of loans: Tuition Fee Loans and Maintenance Loans.
- Tuition Fee Loans:ย These loans cover the full cost of tuition fees, and are paid directly to the university or college.
- Maintenance Loans:ย These loans help with living costs such as accommodation, food, and travel. The amount students can borrow depends on household income, location, and whether they are living at home or away. For the academic year 2023/24, the maximum loan for students living away from home and studying outside London is ยฃ9,978, while those studying in London can borrow up to ยฃ13,022.
Repayments income-contingent, meaning repayments are based on the borrowerโs income, not the amount borrowed. The terms differ depending on when the student started their course:
- Plan 1 Loans: For any students who started their courses before September 2012, repayments begin when the graduateโs income exceeds ยฃ24,990 per year. The repayment rate is 9% of any income above this threshold, with interest rates linked to the Retail Price Index (RPI) or the Bank of England Base Rate plus 1%.
- Plan 2 Loans: For students who started their courses from September 2012 onwards, repayments begin when the graduateโs income exceeds ยฃ27,295 per year. The repayment rate is also 9% of income above this threshold, but the interest rate is more complex. It ranges from RPI for those earning below the repayment threshold to RPI plus 3% for those earning ยฃ49,130 or more.
- Plan 3 Loans: Introduced in 2016 for postgraduate students, these loans have a repayment threshold of ยฃ21,000 and a repayment rate of 6% of income above this threshold.
- Plan 4 Loans: For students from Scotland, with an interest rate at 6.25%.
Repayment could take 30 years (after which any remaining debt would be wiped off) and is done automatically as a deduction from earnings.
What has changed?
In 2022, the UK government announced changes to the student loan system, which affect new borrowers from 2023 onwards. These changes include lowering the repayment threshold to ยฃ25,000 and extending the repayment period from 30 to 40 years. Additionally, the interest rate will be set at RPI only, eliminating the higher rates for higher earners.
Critics argue that lowering the repayment threshold and extending the repayment period increases the amount graduates will repay over their lifetimes, disproportionately affecting lower and middle-income earners. Supporters contend that these measures are necessary to address the rising costs of the student loan system and ensure its long-term viability.
The problem as with any debt is interest, which can become a trap for those on an income high enough to make repayments, but not high enough to pay off the debt.
More than 2.5 million former university students saw their debt to the Students Loan Company (SLC) increase last year โ despite working and making payments.
The payments to the SLC of 2,637,640 former students were last year more than swallowed up by the interest they were charged on their loan balance. Last year the average interest charged to this cohort was ยฃ2,610, meaning they had to repay almost ยฃ220 every month to just keep their loan account static.
Is it a good deal?
The student loan system allows young people to attend university without upfront costs. However, the average student loan debt for graduates in England is around ยฃ48,500 one of the highest in the world. While the repayment system means many will not repay the full amount, student loan repayments will have to be factored into financial planning.
Mortgages in particular could be affected by an outstanding loan debt.
Despite the low interest charged, there could be some circumstances where it might make sense to pay off early.
If you โ or your children โ have student debt to deal with, it could be worth getting an independent view of the impact from a financial adviser.ย
Simply call us at Continuum
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice and you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage
The Financial Conduct Authority does not regulate university/school fees planning.
Taxpayers โripped offโ as millions of student loans may never be paid back (msn.com)
Student living costs in the UK 2024 - Save the Student
Student Loan repayment guide 2024 - Save the Student
Student loans: Almost 1.8 million owe more than ยฃ50,000 - BBC News
