From 1 August 2016, for the first time, new master's students can apply for Student Loans Company loans of up to £10,000 to pay for their courses – these will then only need repaying if they earn enough once the course ends.
This new guide by MoneySavingExpert.com's founder Martin Lewis, explains the new postgraduate master's student loans, with 15 mythbusters including who can get them, how expensive they are, how you repay, are they worth it and when you get the cash.
10+ student loans mythbusting tips, including
This is the first incarnation of this guide; if you think I've missed anything or have any questions do let me know in the MSE Forum discussion or via my Twitter and I will try to add it where relevant.
The new postgraduate master's student loan is only for new starters from 1 August 2016; those already doing a master's won't be eligible. Applications are now open and you can apply on the Student Loans Company website or by post by downloading an application form.
If you've already applied for student finance in the past you can use your existing login details. If not, you'll need to register. You have up to nine months from the start of the academic year to apply (or nine months after the start of the second year if it's a two-year course).
And there are other eligibility criteria too...
- You must be under 60: If you're 60 or over on the first day the academic year starts, you can't get the loan.
- This must be your first master's degree: If you already have a master's degree or a higher qualification (even if it was not from a UK university) you won't be eligible for the loan.
- It must be a full master's course: This technically means a level 7 qualification worth 180 credits. Postgrad diplomas therefore don't count as these are usually 120 or 60 credits.
- It needs to be a maximum four-year course: Any master's course including taught, research, distance learning and professional, in any subject in an eligible UK university (one that has power to give degrees), is fine.
It should be a one- or two-year postgraduate master's course, or if you're studying part-time, the course must be at least 50% intensity (ie, a maximum four-year course). You can also get the loan if you're on a three-year part-time course even if there is no full-time equivalent.
- This must be your only funding: If you're able to apply for a bursary instead, eg,a healthcare bursary from the NHS, a social work bursary from the Department of Health, Social Services and Public Safety (DHSSPS) or a bursary from Student Awards Agency Scotland (SAAS), you won't be eligible for the postgraduate loan.
- You must be a UK national living in England: If you're a UK national (so English, Scottish or Northern Irish), you must be living in England to qualify for this. If you're an non-UK EU citizen, you can get this as long as you've been living in the EU for the past three years (so yes that does mean French students can get it even without living in England but Scots can't).
The situation for those in other areas of the UK varies.
Currently, some postgraduates can apply for a loan of up to £7,900 to help with their tuition fees and living costs. This is only available to those studying a taught postgraduate course – not to research or professional students.
More info: Student Awards Agency for Scotland
Currently, there's no postgraduate loan available for Welsh students. Though this is under consultation.
More info: Student Finance Wales
Currently, there's no postgraduate loan available for Northern Irish students. Though there are discussions to introduce one from 2017, yet this hasn't been confirmed.
More info: Student Finance NI
Update: It's been announced that from 2018 there are plans to introduce a new student loan for doctoral students of up to £25,000. But this is still open to consultation. For now this guide will only focus on the master's loan.
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The maximum loan amount you can get is £10,000 regardless of whether your course is over one year, or a number. This is because the Government has said the average master's course fee is around £8,000 and so has set a maximum loan limit of £10,000, so there is a little extra to help toward other expenses.
If your course costs more than £10,000 you'll have to fund the rest yourself.
You can choose how much you want to borrow. It's not dependent on your income or the course fees. If you don't want a loan then you don't have to take it.
KEY TIP: You don't have to decide at the start – you can increase your borrowing up to the maximum £10,000 until a month before your course ends.
Unlike undergraduate loans where the Student Loans Company (SLC) pays the university the tuition fees directly, for master's courses the money is paid to you. If you change course during the year to one that is not eligible for the loan, or you leave during the year, you won't receive the final loan payments. You will still need to repay what you have received.
The timing of the payments varies depending on course length...
- One-year master's: It's paid in three instalments. You'll get the first payment when the university confirms your placement to the SLC, and you'll get the other two payments during the year.
- Two-year+ master's: You'll get half the money in the first year, again in three tranches: one when your place is confirmed and two more during the year. The rest will be paid in three tranches in your second year. It works this way even if your master's is longer: you still get all the money in the first two years, so you will need to budget accordingly.
KEY TIP: If you have a longer course than two years, the fact you'll be given the money early is tempting. So I would suggest you open up a top savings account and put the money for the remaining course-fees away in there and think of it as sacrosanct; don't allow yourself to touch it for anything else – otherwise you may struggle to pay for your final years.
However because the system is still being set up the first payments won't be taken until April 2019. So if you are starting this year, in 2016, and on a one-year course, you'll have an extra year before your repayments start.
Once you're eligible to start repaying, you will only actually repay if you're earning above £1,750 a month – equivalent to £21,000 a year (and this threshold is not set to rise until at the earliest 2021).
The amount you repay for postgraduate loans is 6% of everything above that, this is lower than undergraduate loans which are set at 9% above the threshold.
Even if you've started repaying the loan in a year, but then lose your job or take a pay cut, your repayments drop accordingly.
Of course if you never earn over £21,000 that means you'd never need to repay a penny.
KEY TIP: Earnings doesn't just mean money from employment or self-employment, in some cases income from investment and savings count too, if you have that, read these links...
What counts as additional income for student loan repayment purposes?
If you have additional annual income of over £2,000 from savings interest, pensions or shares and dividends, this will also be treated as part of your income for repayment purposes. You'll need to repay 6% 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 £540 a year (6% 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?
Yes. The student loan has been set up as a contract, not a tax; therefore, the fact you're no longer living in the UK doesn't affect that contract.
The rules state you're still obliged to repay based at 6% 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.
What's more, the Government has said it will chase people who move abroad more thoroughly than it has in the past – through 'sanctions' and prosecution. We'll update this guide when more on this becomes available.
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 (known as final salary 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, 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 (where you save up a pot of cash – this is what most people now have). If you pay in to 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. In other words your pay before the pension contribution.
The exception to this is if you pay via salary sacrifice (where you give up income and your firm contributes for you), then it comes from the after-contribution income.
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 in to your pension (£800 net) each year, you could pay around £90 extra in student loan repayments.
All student loans since 1998 have been repaid through the payroll just like income tax. What this means is that once you're working, your employer will deduct the repayments from your salary before you get it. So the amount you receive in your bank account each month already has it removed.
This means no debt collectors will come chasing as you don't have a choice in the matter and will have paid it automatically.
If you're self-employed you repay the student loan in the same way as you repay income tax. This is done via HM Revenue & Customs's self-assessment scheme. At the end of each tax year, you calculate your earnings and the appropriate amount of tax and loan repayments, then send it to HMRC. This also applies if you have additional self-employed earnings on top of employment.
If you're self-employed and fail to pay, you'll be sent a reminder. Ignore that, and in a similar way to failing to repay your taxes, you could end up in court. More information is available for graduates on the Student Loans Company website.
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, you won't have to repay a penny.
It's one reason those who are relatively near retirement, who don't have a degree and want one, will find doing one very appealing. This is because unless they've a huge pension, they know they'll never have to repay.
What happens on death or incapacity before thirty years if you've not repaid yet?
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 would 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).
If you already have an undergraduate student loan, you'll repay both, at usually 15%, but they are kept separate
The reason the amount you repay here at '6% above £21,000' is lower than the '9% above £21,000' for undergraduates is because many master's students will still be repaying their undergraduate loan too. The two loans are paid together, but treated separately. In other words...
They wipe at different times:
If you are repaying both, once one is cleared you stop paying it, but will keep paying the other. Not all undergraduate loans wipe after 30 years, some are sooner, some later (see when will my loan wipe?), but your master's loan is always 30 years.
You repay both loans at the same time:
The total repayment for both loans will depend on which undergraduate loan you have; full info in three types of student loan.
- If you started your undergraduate degree in or after 2012: The repayments will be aligned, so rather simply you will pay 15% of everything you earn above £21,000. So if you earn £31,000 you will repay £1,500.
- If you started your undergraduate degree between 1998 and 2012: You will repay 9% of everything above £17,335 currently (rising to £17,495 in April 2016) for your undergraduate loan, plus 6% of everything above £21,000 for your master's loan.
- If you started your undergraduate degree between 1991 and 1998: Your undergraduate loan works a different way: you pay a fixed amount back each month regardless of earnings, provided you earn over £28,828 currently. You will then repay 6% of everything above £21,000 for your postgrad loan.
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The doctoral student loan is due to start in 2018 – take that after a master's and your repayments will be 9% for both
There's currently a consultation underway to introduce student loans for PhDs and other doctoral courses, from 2018. As it currently stands, the plan is that those who don't have a Research Council Living allowance will be able to get a student loan for up to £25,000.
This loan will operate similar to this master's loan – but because the borrowing is bigger, the repayments will be set at 9% of everything above £21,000.
Yet, if you get that on top of the master's loan, the plan is the two will be merged. So, your master's loan will also be repaid at 9% on everything above £21,000, rather than the 6% if you take the master's loan as a standalone.
Of course, this is all provisional at the moment. So just have it in the back of your mind, rather than taking too much of a view on it.
As soon as you receive the money from the Student Loans Company interest'll start accruing on the money. The interest rate is set at...
3% plus the RPI rate of inflation
Yet this doesn't change on a monthly basis. In practice each year the rate changes in September based on the Retail Prices Index (RPI) inflation rate for the prior March.
March's (2016) RPI rate is at 1.6%, which means the amount you owe will grow by a total of 4.6%.
KEY TIP: Just because interest is charged, doesn't mean you'll pay it. That's because only those who clear the amount they borrowed within 30 years will ever repay the interest – and only medium- and higher-earners will hit that (see point 12 below).
When you borrow from a bank for a credit card, loan or mortgage, lenders look at three pieces of information to evaluate whether they'll make money from you – your application form, any previous dealings they've had with you and crucially, the information on your credit reference files (full info: how credit ratings work).
Most normal financial transactions and credit relationships you have are listed on these files – though student loans are not included (with the exception of students who started university before 1998 under the original loans system).
So the only way loan, credit card or mortgage providers know you've got a student loan is if they choose to ask on application forms. They can do this, and it happens, but in general it's only for bigger value transactions such as mortgages.
In many ways though the impact of getting this loan is less about the fact it is borrowing in itself, and far more the reduction of disposable income from the repayments.
So if you're trying to figure out what impact it will have, imagine you'd simply had a pay cut of the amount you'll be repaying for the loan – that's how lenders mainly see it. For more help on how lending works see my free First-Time Buyers' Mortgage Guide and Remortgage Guide.
Typical full-time English undergraduate student loans are currently upward of £40,000 once tuition fees and living loans are incorporated. When you do the maths, and add the interest, as repayments are fixed based on earnings, it works out that only very high earners will clear it in the 30 years before the debt wipes. See who'll clear the loan.
The postgraduate master's loan however is for a much smaller amount. And even though there are lower repayments, the maths shows you are more likely to clear this within 30 years. For example, someone with a £10,000 loan, earning a starting salary of £25,000 that rises each year by more than inflation, would clear the loan within 18 years.
This is important to consider, as it means unlike undergraduates where the 'price tag' of what you borrow often bears little relationship to what you repay, with postgraduate loans the two are more closely linked – and you need to add interest on top.
However there are a number of key factors that affect this:
- The higher your earnings potential the more likely you are to repay it in full within 30 years.
- The younger you are the more likely you are to repay within 30 years (as those starting later will be eligible to repay in retirement when incomes are likely lower).
- The less you borrow the more likely you are to repay within 30 years.
You have a right to pay off the student loan early – even while you're studying if you chose – or, as is more likely, to make overpayments after study to clear it quicker.
Yet this doesn't mean you should pay off early. While in general I'd always encourage people to repay their debts as quickly as possible, student loans are one of the rare cases where that will be a bad decision for some people. There are two reasons for this...
1) This is a 'better' loan than most commercial loans. The rate here is far cheaper than standard credit cards, loans and some mortgages – so paying those off first is certainly a priority. But just as important is that your repayments here depend on what you earn – great insurance if you lose your job or can't work as you don't have to repay it. Commercial loans don't do that.
Therefore if you're planning future borrowing, such as for a mortgage or car loan, it is worth asking yourself whether you should pay this off, only to then have to borrow back at a higher rate later. Instead you could just stick this in a top savings account where the interest paid will almost cover the student loan interest rate, and then use the cash to get a mortgage later.
2) You may not need to repay all of it. As explained above, some people won't need to repay the whole loan before it wipes. And even if it looks like you will, a change of circumstances could affect that. So by overpaying unnecessarily you could simply be paying money that you would never have needed to repay.
This is a relatively cheap form of finance, compared with commercial loans, and the fact you only repay in proportion to your income and it wipes after 30 years is hugely beneficial. So if you don't need the cash (and we ignore the morality of using taxpayer money to make a gain) the question of whether it could still be worth taking is interesting.
Certainly you're currently unlikely to make much gain from stoozing this cash (where you borrow cheaply to then save at a high rate to make money) as few savings accounts come close to paying more than RPI + 3% interest.
There are however two scenarios where it would be financially worthwhile to take it when you don't need it…
- If you're unlikely to repay the loan in full within the 30 years. For example, if you were aged 59 taking a course, unlikely to ever go back to full-time employment and living off pension earnings of under £21,000, you'd never need to repay this cash, so borrowing more would be a big win – at taxpayers' expense.
- If you were likely to need other borrowing in future. In effect what we need to do is assess whether you'd be better off to borrow this now, and keep the cash to use later, instead of taking another form of borrowing later.
For example, if you planned to borrow for a car in future, you'd usually be better off to take this loan to fund your studies and use the cash later to buy the car. This is because student loans have far better terms, and are usually – not always – cheaper (see Cheap Loans).
It's more complex, if you'll want a mortgage in future. The student loan has far better terms than a mortgage – after all unlike a mortgage lose your job and you don't have to repay it. Plus the bigger your mortgage deposit the lower the mortgage interest rate you will get – so taking the student loan and keeping the cash for a deposit looks attractive.
However taking the student loan reduces your disposable monthly income, which will hit affordability criteria, and this can reduce the amount you'll be able to borrow.
As a rule of thumb then, if you've got a decent deposit already saved and will struggle to borrow what you need (if you've less disposable income) – you're probably best not taking the student loan. If not, then maximising the deposit (aim for at least 10%, see the First Time Mortgage Guide) takes priority, so taking the student loan to do that helps (just don't spend it).
So now you understand it, the obvious question is, "how fixed is all this?"
In theory it shouldn't change, but in practice it can. Parliament is omnicompetent. In other words, it's completely free to make and change rules made in the past. This means there is no 100% guarantee the system will remain unchanged for the 30 years until you're clear. It's worth being aware this is a risk factor.
More so, student finance rules are not enshrined in statute, so can be changed by the Government of the day even without a vote in the House of Commons.
In the past it has always been thought that retrospective changes to the system go against natural justice and it hasn't happened – after all each time a new student finance system has been introduced, it has only applied to new starters.
But that sacred trust was breached in November 2015 – the Government froze the repayment threshold for all those who started in 2012 and beyond. The threshold was meant to increase. This effectively hiked the cost of student loans above what people had thought they would be when they started university. That shouldn't happen. No commercial firm would be allowed to do so.
This is a very worrying situation as it means it's difficult to trust the system. Yet unfortunately if you want to get a master's you've no choice.