Martin Lewis: 'Why with student loans what you borrow is mostly irrelevant...'
With student loans, what you borrow is mostly irrelevant, MoneySavingExpert.com founder Martin Lewis has explained in his latest episode of The Martin Lewis Money Show on ITV. That's because it's what you earn that actually counts. Here's what you need to know.
The clip above has been taken from The Martin Lewis Money Show on Thursday 11 March 2021, courtesy of ITV Studios Ltd, all rights reserved. You can turn on subtitles by selecting the keyboard image at the bottom right of the video. You can also watch the full episode on the ITV Hub.
Martin explains it's not what you borrow, but what you earn, that counts
Martin debunked several student loan myths during the course of his latest show - watch Martin's full ITV student finance show (11 March) - but his main point was that how much you've borrowed is mostly irrelevant. He explained: "It is what you earn that dictates what you repay, not what you've borrowed. The amount that you've borrowed only dictates whether you'll clear it or not within the 30 years before it wipes.
"In England, it's predicted 83% of graduates will not clear it in full within the 30 years, which means that in reality, this doesn't operate like a debt for them. It's effectively an additional form of tax."
Martin tested this concept with Oliver, who appeared on the show with his family and who is hoping to study engineering at Durham University this year. Martin took the example of someone earning £37,295, and asked Oliver how much they'd repay on varying loan amounts.
- You'd repay £900/yr on a £20,000 loan. Martin asked Oliver: "So you're repaying 9% of what you earn above £27,295. OK Oliver, your loan is £20,000. That's how much you've borrowed in total. You've left university, you're now earning £37,295, exactly £10,000 above the threshold. How much are you repaying?" Oliver correctly replied: "1% is £100, so 9% is £900."
- You'd still repay £900/yr on a £50,000 loan. Martin pushed back with another example saying: "Let's imagine now, you're still on the same salary, but your loan is £50,000, how much do you repay?" Oliver, again, correctly said: "Well, it's on your salary, so still £900."
- And you'd continue to repay £900/yr on a £3 million loan. Martin then said: "So let's say they put tuition fees up to £1 million. You owe £3 million. But you still earn £37,295. How much do you repay a year?" Once more, Oliver said: "Still £900." To which Martin added: "So whatever your borrowing is, you're still repaying £900 a year on that salary."
See our Student Loans Mythbusting guide for more information on how this works.
Most won't start to repay until they earn over £27,295
In addition to Martin's explanation that student loan repayments are based on earnings, not the size of the loan, he also discussed the following key points:
- Most don't repay until they're earning over £27,295/yr. Martin explained that once you leave university, you only repay when you're earning above a certain salary threshold - for students from England and Wales this is £27,295 from April 2021 (£26,575 currently). You repay starting at a lower threshold if you're from Northern Ireland or Scotland.
- You repay 9% of everything you earn above that. So this means that if you earn more, you repay more.
- It's repaid via PAYE, like income tax, and doesn't go on your credit file. Most normal financial transactions and credit relationships you have are listed on your credit file – yet student loans are not included. So the only way loan, credit card or mortgage providers know if you've got a student loan is if they choose to ask on application forms.
They generally only do this for larger transactions, such as mortgages, where Martin explained lenders will look at your disposable income - which may be lower if you're repaying a student loan still.
- Your loan's eventually wiped. You stop owing either when you've cleared the debt, or when 30 years (from the April after graduation) has passed, whichever comes first. This is 25 years if you're from Northern Ireland.
- You may end up repaying a lot, but student loans don't work like a debt. Martin explained: "You might end up paying more than £50,000 in total. No-one should think I'm saying that means it's cheap - it can be expensive. If you're a decent earner, you might not repay that £50,000 price tag - you could repay well over £100,000.
"But my big point is everyone says; 'I'm so scared of the debt', but it doesn't work like a debt. It's not going to be hanging over your head. If you don't earn a lot, you won't have to repay anything. If you earn well, you're going to repay a shedload."
Martin went onto explain that when it comes to maintenance (living) loans that these are means-tested (unlike tuition fee loans), so parents are implicitly expected to contribute to top-up any reduction but are never told this. Read our Beware the Hidden Parental Contribution section in our Student Loans Mythbusting guide for more info.