6 Student loans – accumulating and repaying the debt

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This photograph shows students at university. There are pound signs over the top of the image.

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 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 away from home in London, who takes out the maximum annual loans for tuition fees and maintenance would borrow £9250 and £13,022 respectively for the 2023/24 academic year. Over a three-year period their accumulated debt (including interest) would be close to £70,000.

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. In 2023 this threshold was £25,000 in England, £27,660 in Scotland, £27,295 in Wales and £22,015 in Northern Ireland.

The rate you repay the loans is then set at a percentage of your marginal income above the defined threshold – 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. This period is either 25, 30 or 40 years depending on which student loan scheme you are on.

The exact terms – including the interest rates charged – vary across the UK and across the various schemes that have been in place since student loans were introduced. To see the exact details that apply to you follow the link below.

Student finance for undergraduates [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]

Now 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.Video player: mmmft_1_video_week4_lewis_studentloans.mp4

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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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