Managing my money for young adults
Managing my money for young adults

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Managing my money for young adults

6 Student loans – accumulating and repaying the debt

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Figure 3

Student loans do not have to be repaid in the same way that conventional loans from a bank have to be repaid. However, they do attract an interest charge from the date the money is advanced.

The interest charge is set in September of each year. The basis of the charge has varied over the history of student loans.

The scale of the loans involved, and the outstanding debt accumulated even during just a three-year degree course can be substantial.

As an example, a student living in London, who takes out the maximum annual loans for tuition fees and maintenance for the 2017/18 academic year, will borrow £9250 and £11,002. Over a three-year period their accumulated debt could exceed £60,000.

For new student loans, from the date the money is advanced until the April after you leave the course, interest is added at the Retail Prices Index (RPI) inflation rate plus 3%. This rate of interest is adjusted each year in accordance with March’s RPI inflation rate.

From the April after leaving the course the rate of interest you’re charged is simply the RPI rate if you earn less than £21,000 a year.

Once your annual income rises above £21,000 the rate charged is the RPI rate plus a margin of up to another 3%, depending on your earnings level. The top interest rate of RPI plus 3% is applied to the student debt owed by those earning over £41,000 a year. So if the RPI rate is 2.5% per annum, for example, the maximum interest charge will be 5.5% per annum for those earning over £41,000.

Of course, adding interest to the original sum of the loan causes the total accumulated debt to build up steadily.

The crucial matter, though, is not how much you have to borrow to finance your education but how much you will end up paying back.

For those going to university from September 2012 onwards you only start to repay the loans:

  • from the first April after you’ve left your course (or, if you study part-time, from the April four years after your course started)
  • when you have an income level above the defined threshold for repayment – currently £21,000 per annum in England and Wales and £17,775 per annum in Scotland and Northern Ireland. (Note that the theshold for England and Wales may soon be raised to an annual salary of £25,000.)

The rate you repay the loans is then set at a percentage of your marginal income above £21,000 – with the current marginal rate being 9%.

So if your income does not exceed the threshold level then you will not have to make any repayments of your debt. This means that repayments of student loans are really more like a tax than conventional debt repayments for which no consideration of your income level is made.

Note that student debts are written off if they are not repaid within specified periods. For new students these currently are 30 years for England and Wales, 35 years for Scotland and 25 years for Northern Ireland.

Watch this video where Martin Lewis explains further how student loans end up being, in effect, a graduate tax with only a minority of people forecast to end up repaying the full amount of money borrowed, including the interest accumulated.

Download this video clip.
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Transcript

MARTIN LEWIS
Tuition fees, the maximum tuition fees allowed at the moment, 9,250 pounds. You were pretty close on that. 9,250 pounds a year, over three years, you take a three-year course, it's 27,750 pounds.
That would be the cost of the tuition fees. But also, crucially, you get a loan for living. The loan for living depends on whether you live at home, whether you live outside of London away from home, whether you live in London away from home. The maximum possible loan for living is about 11,000 pounds.
We add 11,000 to the roughly 9,000. [INAUDIBLE] you're getting on for nearly 60,000 pound potential loan, which you were talking about. That is the loan. That's the amount you're borrowing.
It's a scare the pants off your brown trousers type sum. But newspapers love to put it in headlines. Politicians love to spit across the House of Commons at each other, discussing it. And in for all intents and purposes for you, I want you to take that figure, that nearly 60,000 pound figure, and forget it, because it's completely irrelevant.
This is the brain twist that you need to understand. Do you know what "nominal" means? It's not sort of real. It's a sort of nominal account.
You've got this borrowing sitting there. the amount that you owe. So let's just do something. Here's what you repay under the current system.
You repay, once you leave, in the April following graduation, 9 per cent of everything you earn over 21,000 pounds. I'm going to be really didactic and just push this on you, because this is so important. I'm going to get you to say it.
9 per cent of everything you earn over 21,000 pounds, how much do you repay?
CLASS
[INAUDIBLE]
MARTIN LEWIS
Come on. You're 16, not 6. How much do you pay?
CLASS
[INAUDIBLE]
MARTIN LEWIS
The syncing wasn't good, but the spirit was fine. 9 per cent of everything you earn over 21,000 pounds. If you earn 22,000 pounds in a year, how much do you repay?
CLASS
9 per cent.
MARTIN LEWIS
9 per cent of what?
CLASS
Everything you earn.
MARTIN LEWIS
You earn 22,000 pounds. How much do you repay? I'm looking for a number.
STUDENT
90 pounds.
MARTIN LEWIS
90, who said 90? Well done. 90 pounds. 22,000 is 1,000 above 21,000. 9 per cent of 1,000 is 90 pounds.
If you earn 22,000 pounds, you repay 90 pounds in a year. If you earn 18,000 pounds, how much do you repay?
CLASS
[INAUDIBLE]
MARTIN LEWIS
Correct. If you earn 90,
CLASS
[INAUDIBLE]
MARTIN LEWIS
If you earn 21,
CLASS
[INAUDIBLE]
MARTIN LEWIS
Nothing, 'cause you're not over 21. But if you earn 31,000 pounds, how much do you repay? You know. But you won't shout out again, because you've already done it once. And you don't want to be a smartass. That's fine.
If you earn 31,000 pounds, 9 per cent of everything above 21,000, 31,000. How much above 21,000 is 31,000? 10 000. What's 9 per cent of 10 000? 900. You repay 900 quid.
That's what you repay. And how long do you repay it for? You got it right. Go on. Go for it.
STUDENT
30 years.
MARTIN LEWIS
30 years. You repay it for 30 years, and then it wipes, or unless you die. But when you get a critical illness when it is wiped earlier, or you've cleared what you borrowed plus the interest in that 30 years. And that is the crucial equation that goes on here.
So when people talk to you about a debt, they talk about how much you've got going over you. Actually, it doesn't matter. Let's just really knock this in. I'm going to ask the same question. This is quite deliberately drilling it in.
Earn 31,000 pounds, you repay,
CLASS
900.
MARTIN LEWIS
900. If my original loan was 20,000 pounds and I earn 31,000 pounds, how much do I repay? 900. 900. Yeah, good.
Have confidence. The rest of them didn't have the balls, but you did. That's good.
Now, 900 pounds. 900 pounds, because 31,000 is 10,000 more than 21,000. 9 per cent is 900 pounds. That's if you borrowed 20,000 pounds.
If your original loan was 50,000 pounds and you earn 31,000 pounds, how much do you repay? All of you, how much do you repay?
CLASS
900.
MARTIN LEWIS
900. If they put tuition fees up to a million pounds a year, so you now owe three million pounds and you earn 31,000 pounds, how much do you repay?
CLASS
900.
MARTIN LEWIS
You see my point. The amount that you borrow hasn't changed how much you repay. And let's just go on that really easy one.
If you repay, if your tuition fees were three million quid, what are you going to do? You're going to repay 9 per cent of everything you earn above 21,000 and you're going to repay it for 30 years, because you'll never clear it. And that's what you got to repay.
So if they put tuition fees up to three million pounds and then they doubled them up to six million pounds, do you think you'd pay any more? Because you're only paying 9 per cent of everything you've earned above 21,000 pounds.
Now the stats actually show it is currently predicted only 23 per cent of graduates will clear what they owe plus the interest within the 30 years before the debt wipes. Only 23 per cent, just a little bit more than one in five. So if you were average for graduates, it would be the 23 per cent highest earners, maybe these couple of rows, these three rows in the room might clear it in the 30 years. The rest of you wouldn't.
End transcript
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Important questions about student loans

Let’s look at a couple of questions that are often raised about student loans.

If you expect to be earning above the threshold level during your working life could there be a case for simply paying off your student loan debt as quickly as possible?

This would only apply if you are certain that you would repay your student loans (plus interest) prior to the point where the remaining debt is written off. Even then you are taking a risk as a future government could write off student debts immediately – so if you repay early you would miss out. Additionally if you are replacing your student loan debt with new borrowed money you need to check that the interest rate on the new debt is lower than on your student loan debt. For most people repaying early would not be a wise move.

Does your student loan debt affect your ability to borrow other money, such as a mortgage for property purchase?

The debt will not be taken into account when determining your credit rating. Repayments on student debts are unique in being linked to your ability to repay, and this means that student loan debt is disregarded in the computation of your credit rating. However, when you apply for other loans or a mortgage your student loan commitments will be taken into account when the lender considers if you can afford to repay the money you want to borrow.

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