Updated December 2015
Ignore newspaper headlines about students leaving university with £50,000 of debt. That’s a mostly meaningless figure. What counts is how much you'll repay, for some that's far more, for others it's free.
This guide by me is written to bust common myths about student loans, grants and finance, including the 20+ key facts every potential student, parent and grandparent should know.
20+ student loans mythbusting tips, including
Before we start, I'd just like to say:
For 23 years we educated our youth into debt when they go to university, but never about debt.It was for this reason, and while no fan of them, when massive changes were announced to student finance for those starting in 2012 or beyond - including the trebling of tuition fees - I agreed to head up a Student Finance Taskforce working with the NUS, universities and colleges to ensure we busted the myths and misunderstandings that resulted from so much political spittle flying.
For me what really counts is that no student is wrongly put off going to university thinking they can't afford it. Some may rightly be put off, but unless you understand the true cost, how can you decide? I hope this guide helps achieve that.
Thankfully since then, we've also won a separate campaign to get financial education on the senior school National Curriculum in England. Yet it'll be a long time before that truly pays dividends - so there's still a lot of nonsense spoken about student loans.
Don’t confuse the cost and the price tag
With headlines shouting about the £50,000 student debt and that getting bigger as living loans increase in 2016, it’s safe to say many students and parents are scared by this huge sum - and worry about how they'll ever repay it.
But in essence that fear is misplaced. That's because the price tag of university is mostly irrelevant. What matters in practical terms is how much you have to repay - and that's a completely separate number from the total amount of tuition fees, maintenance loan and interest, because it all depends on what you would pay.
What you repay solely depends on what you earn after university. In effect this is, financially at least, a 'no win, no fee' education. Those who earn a lot after graduating or leaving university will repay a lot. Those who don't gain too much financially from going to university will repay little or nothing.
This guide applies to the system started in England in 2012
If you started before that you're on a different system, please see the Should I repay my student loan? guide for full info on past loan systems.
You don't need the cash to pay for university
It ISN'T a case of 'pay up or you can't go'. Once your application has been processed, tuition fees are automatically paid by the Student Loan Company. And there is a loan for living costs too.
Full-time students only need to start repaying these in the April AFTER they graduate (or leave) at the earliest, no matter how long your course is.
Of course you don't have to take these loans, you could pay the tuition fees directly. Yet as you'll see (in point 15) that's often a bad idea.
However, some students won't get the same support as the majority...
If you already have a higher education qualification
If you already have a higher education qualification you're unlikely to be able to borrow the money. Included within undergraduate courses are Higher National Diploma/Certificate courses and certain teacher training courses such as PGCE.
Wanting to study health care or medicine?
The Chancellor announced an overhaul to the existing grants system for student nurses in his Autumn statement in November 2015.
From academic year 2017/18, student nurses will no longer receive grants and will instead apply for student loans, which the government says means they'll get more to live on than they'd get through the grants system.
The amount students will get depends on whether they live inside or outside London and whether they are living at home.
Taking into account a long-course allowance, the maximum a student would get living outside London and not at home is £10,092.
Nurses who have already started their studies will contine to get grants and nursing students who've already applied for grants for the 2016/17 academic year will also receive these.
When the nurses leave their studies and start to repay their loan, it will be under the normal loan repayment system described in this guide, meaning they will repay 9% of everything they earn above £21,000. The starting salary for a nurse is £21,600, so in the first year they will pay about £54 towards their student loan.
How the system currently works
Medical and health care students get support from the NHS Bursary Scheme, where you'll also get an additional NHS grant and maintenance loan from Student Finance England. The amounts and rules are different depending on the course.
Undergraduate medical or dental students on five/six-year courses will have all tuition fees paid in their fifth and final years. Those on four-year courses must contribute £3,465 to their first year fees, then receive £3,465 in years two, three and four as a bursary. Both will then be able to apply for a student loan for the remainder of their fees (eg, undergrad med student can apply for a loan for 1-4 years).
Graduates on the four-year accelerated medicine programme will have to fund the £3,465 tuition fee for all the years themselves. Eligible students can apply for a loan up to £5,535 to cover the remaining tuition fees.
You must re-apply every year for the NHS bursary, and applications have to be received within six months of the first day of the academic year.
Fees for suitable non-medical courses, eg, physiotherapy, nursing and midwifery, are usually paid directly by the NHS so eligible students will not be required to pay tuition fees.
They will also be eligible for a £1,000 grant, means-tested bursary up to £4,395 (£5,460 in London, £3,351 if living at home, less for courses under 30-weeks each academic year) and a non-means-tested maintenance loan of up to £2,324 (£3,263 London, £1,744 home; all are reduced in final year of study).
If you're a Muslim student
Muslim students in England are set to be able to get alternative student finance acceptable under Sharia law, although this won't be available until 2016 at the earliest. For more information see Sharia-compliant student finance news.
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Once you leave university, you only repay when you are earning above £1,750 a month (equivalent to £21,000 a year) and then it's fixed at 9% of everything you earn above that. Earnings mean any money from employment or self employment and in some cases earnings from investment and savings.
Even if you've started repaying the loan, but then lose your job or take a pay cut, your repayments drop accordingly. To labour the point somewhat:
If you earn £22,000 in a year, what do you repay?
The answer is £90, as £22,000 is £1,000 above the threshold and 9% of £1,000 is £90.
And if you earn £31,000, what do you repay?
The answer is £900. £31,000 is £10,000 above the threshold and 9% of that is £900.
"How on earth will my child be able to afford to repay these debts if they get a poorly-paying job?"
This panicked question has been thrown at me by many parents - and it's really important to examine it in the light of the required repayments.
Someone on a low wage will be required to repay little or nothing at all. In fact, only higher earners will be shelling out large amounts.
It's important to note that not repaying much because you're just over the threshold isn't being bad. The system is, in reality, a graduate contribution, designed so that, in the main, those who gain the most financially out of university contribute the most.
The £21,000 threshold was supposed to rise from 2017 - now, IT WON'T
When the changes to student finance were announced in 2012, it was repeatedly stated by the Government that the £21,000 threshold would rise in line with average earnings in April 2017. In Novermber 2015, it did a U-turn, saying the threshold would be frozen until at least April 2021.
This effectively hikes the cost of student loans for most students - and because it changed not just for future students but for those who were already studying - it is a retrospective hike. As a simple explanation, if you earn £22,000 with the threshold at £21,000 you pay £90 a year - if the threshold had gone up as expected, to eg £22,000, you'd repay nothing.
The only people who gain from this are those who earn such huge amounts that they'd clear their entire loan within 30 years (as this is when it's wiped). More explanation on this in my video in student loan threshold to be frozen.
Earlier in 2015, the Government consulted on whether the student loan repayment threshold should be frozen. I'd already pledged to organise a protest if it happened, and submitted a joint consultation response with MSE objecting to the freeze. Yet even though 95% of responses to the consultation said it's a bad move, the Government did it anyway.
As of Nov 2015 we are looking at other options to try and stop this freeze being implemented - but for your future planning, it's safest to assume the freeze will remain.
Further info on repaying
Technically you repay 9% above £1,750 a month - important if you get bonuses
We’ve stated that you start to repay when you earn £21,000 a year, mainly because most people will go into a salaried job where they earn a set amount each month. However, payments are calculated and taken monthly, so £1,750/month is the important figure.
This means that if you earn £1,500 most months, but overtime or bonuses take you over the £1,750 threshold for one month, then the Student Loans Company will take 9% of anything above £1,750 from that month’s paycheck - even if you don't make £21,000 or more during the year.
Similarly, if your income is volatile this could affect you too. Let’s take an extreme example: if you earned £15,000 one month, and nothing for the rest of the year, you’d still pay 9% of everything you earn over the £1,750 threshold that month.
In this extreme case, the student loans company would take just under £2,000 that month, even though your total earnings for the year are £6,000 under the threshold.
If this happens, you can reclaim any 'overpayments' at the end of the financial year - you will need all your pay slips to prove your income was under £21,000 during the year.
What counts as additional income for student loan repayment purposes?
If you have additional income of over £2,000 from savings interest, pensions or shares and dividends, then this will also be treated as part of your income for repayment purposes. You'll need to repay 9% of that too via self-assessment.
How are student loans treated for tax purposes?
While the amount you pay is calculated based on your pre-tax income above £21,000, the money is taken after you’ve paid tax. For example...
If you earn £30,000 a year gross (pre-tax) salary, you will repay £810 a year (9% of the £9,000 above £21,000).
Yet you still pay tax on the entire £30,000 income. You don’t get any tax breaks on the fact you’re repaying the student loan.
Do I still have to repay my student loan if I move overseas?
The answer is yes. The student loan has been set up as a contract, not a tax, therefore, the fact that you're no longer living in the UK doesn't affect that contract.
The rules state you're still obliged to repay based at 9% of all earnings above (the local equivalent of) £21,000 a year. Not doing so could lead to substantial penalties.
If we ignore the moral obligation to repay the state for the education it provided you, the real question here isn't "do I have to", but "how can they make me?".
This is an issue of enforcement. Certainly if you temporarily leave the UK and come back having missed some payments, expect to be pursued. If you move abroad permanently, never to return, there may be no attempt to pursue you in a foreign court. But there are no guarantees of that.
Some further information on this for current graduates (likely to be similar for future graduates) is available on the Student Loans Company website, though it's a bit sketchy in parts.
How do student loan repayments affect my pension contributions?
Whether student loan repayments are taken from your salary before or after you make a pension contribution depends on how you contribute, and what sort of scheme you're in.
Defined benefit schemes. If you're in an employer's pension scheme, eg final salary/average salary your student loan repayments will depend on how the scheme’s administered.
You pay student loan repayments on the same income that your employer pays national insurance contributions on. So, if your pension contributions lower this figure, then that’s the one assessed for student loan repayments.
However, some defined benefit schemes take the pension payment pre-tax, but after national insurance. In which case, you’ll have slightly higher student loan contributions.
- Defined contribution schemes (this is what most people now have). If you pay into a personal pension, whether monthly via your company payroll or directly as a lump sum, student loan contributions are worked out using your gross pay (unless you pay into your pension by salary sacrifice).
You can do a self-assessment tax return to have the pension contributions taken into account. But decide if it's worth the hassle of going self-assessment if you don't already. For each £1,000 you pay into your pension (£800 net) each year, you could pay around £90 extra in student loan repayments.
You stop owing either when you've cleared the debt, or when 30 years (from the April after graduation) have passed,
whichever comes first. If you never get a job earning over the threshold, it means you won't have repaid a penny.
It's one reason those who are near retirement, who don't have a degree and want one, find it very appealing as unless they've a huge pension, they know they'll never have to repay.
What happens on death or incapacity
The debt is also wiped if you die, so it won't be passed onto your beneficiaries as part of your estate. It's also wiped if you're permanently disabled in such a way that you'll be permanently unfit to work (in such a case, earnings will usually be under the threshold anyway, but this rule's there for rare cases where unearned income is above the threshold to allow the recipient to keep it all).
Many people earning over £21,000 will never pay it all back within the 30 years
By running the numbers on some typical situations using our Student Finance Calculator, it looks likely only those towards the higher end of the income scale will ever repay all of what they borrowed, plus the interest (see later for info on that).