Full Guide to Managing Family Finances – Chapter 38
Studying in university will no doubt open many doors for you… but will it also leave you with a huge mountain of debt? This article destroys the myths by presenting the straightforward truth about student loans and repaying them.
Graduating in Debt Many graduates feel that once the final exams are out of the way that their troubles are over. Unfortunately, for those who have borrowed large amounts of money to fund their education, the problems may just be beginning. However, although the immediate period after graduation may bring some serious financial challenges there are many different ways to approach the financial problems that are facing the average graduate. In the first instance it is a good idea to understand the truth about some of the historical myths that are often bandied around about student debt and to have some facts that will help you see a way to cope with what may appear to be an insurmountable amount of debt. If some of these myths are challenged it could help to prevent future students from being put off going to university. So, what is the true cost of a higher education and how can it be paid off when you graduate?
The most important fact about university fees is not the amount that is borrowed but what has to be paid back and when. Young graduates who do not manage to break into their chosen career that would pay them a high salary may find themselves paying nothing back. However, those who do earn a substantial wage will pay the total amount back. Paying for university does not require cash. Once a loan is granted the fees are paid by the Student Loan Company as are maintenance loans to pay for living costs. As you would expect, tuition fees are there to pay for your course and maintenance loans cover the cost of housing, food, clothing and books. Full time students get up to £9,000 per year and part timers can apply for up to £6,750 per year. Students who are living at home are entitled to claim up to £4,565 per year to live on and those living away from home are can apply for up to £5,740 if they are staying in a district that is out of the London area. Those students living and studying in London can apply for up to £8,009 per annum and if you want to spend a year abroad during your studying period you can get up to £6,820 per annum.
So What’s the Total? These figures can add up to a minimum of £40,000 which is a lot of debt to carry over into a working life. But, the amounts to be repaid each year will depend upon how much you earn once you start to work. The amount to be repaid is based upon 9% of all sums above £21,000 and this applies to all earnings whether you are employed or self employed. Sometime sums earned from investments are also added into the calculation. If you become redundant or move to a job with a lower salary then the payments will be reduced accordingly. Many parents are concerned about their children getting into what appears to be horrendous amounts of debt and wonder if and when it can ever be repaid. But, the scheme is designed to help those who may end up in lower paid jobs as they will only pay a small amount back whilst those whose earnings are quite high will subsidise the rest. At this moment in time although there were plans to raise the earning threshold this has been put on hold whilst the government holds consultations. If the freeze goes ahead it will mean more students paying off their loans even though they are on low earnings.
One important aspect about repaying the loans is the monthly pay that you receive. The monthly figure of £1,750 is more important than the 9% of £21,000 as annual bonuses and any overtime payments are taken into account when the repayments are calculated. So, if you get an annual bonus the Student Loans Company will adjust the amount to pay for the month that it is paid. The payment of 9% over the £1,750 monthly figure also means that overtime could take you over the limit and your wage will be reduced accordingly by the amounts withdrawn for the loan. Any additional income in the form of interest payments or dividends may also affect the amount you pay back. Additional income of more than £2,000 is considered to be part of your salary and payments will be calculated accordingly. Unfortunately, the repayments for a student loan are calculated on pre-tax income but deducted after tax has been paid so there are no tax perks to be had for repaying student loans. And, if you decide to work abroad after you graduate you will still be liable to make the necessary repayments.
What if I Never Earn Enough? Once a period of 30 years has elapsed any remaining debt will be wiped out. So, if you do remain in low paid employment for that period of time you may never have to make a repayment. Some mature students find themselves in this position because unless they get a huge bonus each year the debt will not have to be repaid. In addition, if you die the debt dies with you or if you become disabled and cannot ever work again it is also wiped out. What all this means is that it is the people who earn the most who will take the brunt of debt for student loans. The scheme was designed to work this way so that students who are living in poorer families can still have access to a decent university education. All repayments are made through your employer’s payroll system and are already gone from the amount you receive in your bank account each month. This means there is no danger of falling behind and no chance of debt collectors chasing you for the money. In the case of those who are self employed, payments are sent to HMRC along with any tax that is owed for the year. Failure to repay could result in a court appearance as the money is owed to the tax authorities who have paid the amount due.
Interest Rates Interest rates for Student Loans are complicated. While you are studying the interest accrues at inflation based on figures for RPI plus 3% of the balance. After graduation this becomes RPI inflation only if you earn under £21,000 and a gradual increase as your salary increases. So, the more you earn the more interest you pay and this is another way that higher earning individuals are subsidising those earning a low income. Likewise, some people will never earn enough to pay back the loan and these individuals are getting the benefits of a free education. The most important point to remember about all these facts and figures is that how much the university charges for a course is meaningless as the repayments of the loan will depend only upon your earning which, in essence, is your ability to pay. This makes student loans vastly different to short term loans or even other long term loans such as mortgages, as you pay however much you are able, and the rest is eventually written off.