How a Student Loan works (if you started university after 2012)
# Repayment:
- Graduates only start paying back once they earn more than £21,000 per year (2017).
- Repayments are 9% of qualifying earnings for 30 years or until the debt is repaid in full, whichever comes first. If earnings drop below the threshold, repayments stop.
- Interest is added to the loan from the first payment. While studying, it is the rate of inflation plus 3%.
- On graduation, the rate varies. (2017). Earn up to £21,000, interest rate is inflation. Earn £21,000 to £41,000, inflation plus up to 3%. Earn over £41,000, inflation plus 3%.
# What if fees go up? This is unlikely to affect how much graduates pay back, as this is based on what they earn post-university. E.g. earn £25,000 per year - repay £360 per year; earn £35,000 per year - pay back £1,260 per year. To work out repayment on any salary, use the calculator at studentloanrepayment.co.uk.
# Does the debt affect their ability to borrow other money?
- Student loans are not included on credit files (with the exception of students who started university before 1998 under the original loan system and defaulted.)
- But some credit card, mortgage and loan providers may ask about student loans on application forms to help them make a decision. Mortgage lenders, in particular, will take any regular outgoings into account when calculating how big a mortgage you can afford.
# Good debt v. bad debt? Many students are unaware of the financial consequences of over-spending but in today's world 'don't borrow' is not as helpful as knowing a few facts about debt.
- Good debt = student loan debt.
- Okay debt = a 0% overdraft that can be paid afterwards.
- Bad debt = credit card debt.
- Ugly debt = payday loans.
Suggest students take the quiz at moneysavingexpert.com/quiz/good-debt.
Source: Martin Lewis in Good Housekeeping, June 2017
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Do you have a child off to an English university? If you are able to, you may feel tempted to pay their £9,000 a year tuition fees (2014 figures). It could be better financially for them to take out a tuition fee loan and / or maintenance loan.
Once they graduate they will need to repay the loans (which have a low interest rate) but will only start paying once their income goes over a specified level (£21,000 per year in 2014). Repayments are put on hold if their income drops below that level. Each year you pay back 9% of any income over the specified level. Around half of university students will never pay off their loan in full.
If you have money to pay the fees, why not put it in the bank, earning some interest and label it 'Child's home deposit'. Once they have graduated you will be able to produce a really useful deposit for a first home. £27,000 is about the average first-time buyer's deposit (2014). That will be more tangible - and appreciated - than paying off a loan that isn't really a debt.
Paul Lewis, RT Money feature in Radio Times, 6-12 September 2014.
