When it comes to university you are probably hearing one extreme point of view or another but rarely, in our click bait culture, do you come across a down to earth, to the facts take on university and the cost. On one side of the argument you will hear things such as “investing in your education is invaluable” and “you can’t put a price on education”. The other side of the debate is equally hyperbolic brandishing headlines like “you’re starting life with £50,000 of debt” or “a degree is a piece of paper and a hat (and the hat’s not included)” – it is true that you still have to buy your graduation robes and hat.
The specifics of the value of a university degree, what degree to choose and alternative education options is one discussion but here at Comparison we wanted to focus on the financial side of going to University.
Myth 1: You Pay 9% Of Your Salary Once You Start Earning £25K
A common misconception is that once you meet the earning requirements to start repaying your loan (£25,725 per year) you pay 9% of your salary. This is not the case. You actually only pay back 9% of earnings over the threshold.
If you earn £28,000 in a year you are earning £2,275 above the threshold. Therefore you will pay 9% of £2,275. That is only £204.75. With annual earnings of £28,000 you would pay £204.75 from your tuition loan.
This is an example for your student loan. Maintenance loans are a separate loan which you will also need to factor into your repayments (more on those in Myth 5).
Whilst you are earning below the threshold you will not pay anything on your tuition loan. The system is designed so that the more you benefit from your degree (i.e. the higher paying your job is) the more you pay back. If you have considered not going to university because you were concerned you might get a low paying job afterwards and be unable to pay your loan it is important to realise that you only pay back 9% of earnings over the threshold, not on your total salary.
Myth 2: You Are Stuck With Loan Repayments For Life
Are you worried that your student loan will follow you to the grave, taking a piece of your earnings for the rest of your life? Many people do because they don’t realise that the repayments end after 30 years (from the April after graduation). No matter how much or how little you have repaid, your debt is cleared after 30 years. If you never surpass the earning threshold to make repayments within 30 years then you don’t repay anything, the debt is wiped out regardless of whether you have paid back most or none of the loan.
Myth 3: Your Tuition Will Cost You £30,000-50,000
You have probably worked it out from the myths we have already debunked but there is a high likelihood you will not pay back your student loan in full. If you do, it means you have done very well for yourself in terms of earnings, congratulations. So whilst the loan may be for the maximum tuition fee of £9,250 per year you will probably not pay this back in full, making it unlikely you will repay £30,000 or whatever the cost of your tuition (plus interest) is.
Myth 4: A Student Loan Is Interest Free
Very few loans are interest free and your student loan is no different. Once you have paid off the principle (the amount you have borrowed) you are left paying off interest but if your earnings mean you will not fully pay the principle then the interest will not affect you. The interest affects the total amount of the loan owed but does not affect the individual instalments you repay, that remains 9% of earnings over the threshold.
Currently interest rates are based on RPI rate of inflation. This is the base interest rate for people earning below £25,725 and the interest rate increases depending on your income capping out at RPI +3% for those earning above £46,305.
For example if you were to earn £35,000 per year your interest would be RPI (3.3%) + 1.5% for a total of 4.8%.
This means for those who will pay off a large portion or all of their student loan increasing your repayments could be a better option. This could significantly reduce the time it takes to repay the loan potentially saving you £1000s in interest.
So far it has been mostly good news and university may seem more affordable than you realised, however depending on your circumstance this next part may change that for you. Please read this carefully and do additional research based on your specific situation. This part is a little bit longer because it is vitally important and we want to give you an unbiased overview showing you both sides of the coin.
Myth 5: Loans Only Cover Tuition Not Living Costs
Just like you have a loan to cover your tuition fees there are maintenance loans available for those who want to live away from home when studying at University. Whilst it is true a student loan only covers tuition a separate loan, known as a maintenance loan, is available for living costs. The loan is designed to cover rent, bills, supplies (e.g. text books) and basic expenses such as travel and is separate to your student loan which pays for your tuition. Maintenance loans are paid back similarly to student loans; you pay 9% on earnings over £18,935 per year.
The sum of the maintenance loan you can take out is dependent on a few factors. The loan is means tested which in basic terms means that it factors in your household income; the more your household brings in the less loan you will receive. It important to do your research into how much your household brings in and what that means for how much loan you receive.
A reduction in loan allowance starts at a household income of just £25,000 (excluding pension contributions and a small adjustment if the household has other dependent children). For many students whose parents or legal guardians earn enough to reduce the maintenance loan allowance the loan may not be sufficient and the parent or guardians will have to offset the difference between the loan and required money to meet basic needs.
Research the specifics of your circumstance including how many children you have, your pension’s contributions and household income and find out how much of the loan you our child will be able to claim. We then recommend working out how much you will need to contribute to living expenses and start saving as early as possible.
If you are your child are planning on going to university in a few years and you currently don’t earn enough to reduce your maintenance loan allowance be careful to consider that this may change by the time it comes to actually going to university. If your income is due to change and surpass the threshold bare this in mind and save accordingly.
The system is designed so that those who earn the most pay the most upfront and those who earn less have access to larger loans but it may still require savings in order to be affordable for you.
Whether university is the right option for you depends on a number of factors but if finances were playing a big role in your decision we hope this post clarified some of your concerns or dismissed some of the myths you may have heard.
Whilst some older students may have had time to build a credit score, students are typically younger meaning they confront some unique difficulties when it comes to finances from not having a credit score which make buying anything on finance or qualifying for credit cards difficult o more expensive car insurance. Setting you finances in order as early as possible can save you large amounts of both time and money in the long term. Start making smarter, more informed financial decisions today with Comparison and compare everything from credit cards to insurance to make sure you are getting a better deal and making the right choice.
*Numbers, Stats And Information May Change*
Before we finish this post it is important to point out that all the numbers we used are accurate at the time of writing but are subject to change. Loan allowances, repayment thresholds, interest rates and repayment percentages etc. are all subject to change. We look to regularly update our information but we always recommend cross referencing all stats, numbers and figures for accuracy.