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Martin Lewis Student Loan Special
4:03pm Wednesday 17th August 2011 in Education News
The political spittle firing both ways about 2012's £9,000 university fees has a nation scared. Yet little's been said about the practical impact on students' pockets – and with 2012 starters applying soon, it's about time it was.
The rows have left grandparents, parents and future students misinformed and believing myths. I ranted about this to MPs of all parties, saying "for 20 years you've educated our youth into debt when they go to university, but never about debt." Soon afterwards I found myself with a then unrefusable invitation to head a taskforce to explain how this system works.
I agreed on the basis that it would be independent, I could still say I was no fan of the changes, and the universities and National Union of Students were on board.
So forget what you've heard. Let me take you through the 18 key facts everyone should know about the changes.
1. Changes ONLY hit new September 2012 starters
Universities can charge £6,000 from September 2012 – or up to £9,000, provided they use some of the extra cash to pay for bursaries or give fee waivers to students from poorer households.
Existing students and 2011 starters stick with the current system and fees (max £3,290/year), even once we get to 2012 and beyond.
2. You DON’T need cash to go to university
It ISN'T a case of 'pay up or you can’t go'. Tuition fees for full-time, first time undergraduates are automatically paid by special Student Loan Company. They only start repaying the April AFTER graduation if they earn enough.
3. It’s repaid like income tax so no debt collectors
Employers automatically deduct repayments before paying you, simply reducing your pay packet. So no debt collectors will come chasing.
4. Earn under £21,000 and you’ve nowt to pay
You repay 9% of earnings above £21,000/year, eg, earn £31,000 and you repay £900/year. If you start repaying, then if earnings drop, your repayments drop accordingly. In 2017, the year after most 2012 starters begin repaying, this threshold starts rising each year, in line with average earnings.
5. After 30 years any remaining debt is wiped
You stop owing when you’ve cleared the debt or 30 years pass (or you die). If you never earn over the threshold, you’ll never repay.
6. Annual repayments will be £540 LESS than now
Today graduates repay 9% of everything above £15,000, but under the new £21,000 threshold more cash remains in graduates' pockets.
|Earnings||Annual repayment now||Annual repayment 2012|
7. Repayments are the SAME whether fees are £6,000 or £9,000
Graduates' monthly repayments are based only on how much they earn, not their borrowing, so fees are irrelevant for this.
8. ‘Above-inflation’ interest is charged
Current graduates pay the RPI rate of inflation. Yet in 2012 while studying the interest’s inflation plus 3%. From April after graduation, earn under £21,000 and it’s just inflation, and above that rises gradually until at £41,000 it maxes out at inflation plus 3%.
9. You WILL owe money longer and MAY pay a lot more
Combining the facts you pay less each year, the original debt’s bigger and the interest rate higher means it will take MUCH longer to repay the loan.
10. Part-time students get tuition fee loans too
Fees are also rising for part-timers to £4,500 to £6,750. Yet for the first time part-timers are now eligible for tuition fee loans, exactly like full-timers (though not maintenance loans).
11. Student loans also cover living costs
Students also get maintenance (living) loans on the same terms for food, books, accommodation and travel. Up to £4,375 is available if living with parents, £5,500 away from home and £7,675 in London.
12. Lower-income family students get living grants
If your household income (either parental or your own) after tax is under £25,000, you get a £3,250 maintenance grant that NEVER needs repaying. The grant shrinks then vanishes above £42,600 income, though the amount of loan you get shrinks if you get a grant.
13. It’s unlikely to impact future mortgage applications
Student loans don’t go on your credit files, although application forms can ask about them. It's likely saving for and getting a mortgage in the early years should be easier, as 2012 starters will have more after-tax income once working. Yet this is roughly countered by longer indebtedness, meaning less disposable income later.
14. For many, £9,000 fees won't cost them more
The combination of lower repayments, higher interest and bigger fees mean many are unlikely to repay in full over the 30 years – even at just the £6,000 tuition fees level.
Even some with starting salaries as big as £30,000 won't repay in full. In which case, there's no additional cost of doing a £9,000 course.
15. Early repayment penalties may be introduced
It's not confirmed yet and still open for discussion (I'm lobbying against, see www.moneysavingexpert.com/earlyrepay), yet it may mean if you take the loan and try and pay early they'll add to the costs.
16. If offered a fee waiver or a bursary, go for the bursary
Those from lower income homes are likely to be offered incentives of up to £3,000 a year by universities. If there's a choice between a fee reduction or cash, most should go for cash. The simple reason is, as many never repay in full, unless you earn a big salary after graduating, you simply won't pay any less due to the fee wavier.
17. It's more like a tax than a loan
It's repaid through the income tax system, you only repay it if you earn over a certain amount, and it does not go on credit files. So for parents it's better to think of it as a tax that your chid will pay if they succeed in earning more, rather than a debt hanging over their head for life.
Those who gain financially from going to university will repay a lot: those who don't will pay little or nothing.
18. You don't need to take the fee loan – but probably should
If parents (or students) have got the cash, you can just pay the fees upfront. Yet for the vast majority of people, on pure financial logic, this is a bad move.
Imagine you pay £27,000 over three years in fees. Then after graduation your child becomes a low paid artist or full-time parent. You will have paid for something that never needed repaying. Even if they earn over £21,000 they still may not have repaid anywhere near as much as you paid.
So unless they're guaranteed a lifetime of high pay (as there is an interest cost while at uni) if the cash is there, its safest to put it in a high paying cash ISA/savings during studies and take the loan.
Afterwards if it looks like it'll be repaid, clear the debt then. Or, alternatively, it may simply be better used towards lowering a mortgage or car loan – worse and costlier forms of debt. If you've questions or want to try the soon-to-be launched repayment calculator, which will show how much you'll repay, see the expanded guide at www.moneysavingexpert.com/students2012