Fee & Loan Changes ‘to Save Students £15,700’
In a bid to win back younger voters, the Government pledged to freeze tuition fees and ease student loans in England, against a backdrop of rising interest rates. We look at the changes and explain their implications for paying back your student loan.
Tuition fees frozen at £9,250 maximum
Freezing annual fees until 2019 overhauls the original plan to raise them to £9,500. And the government will also now consider varying tuition fees for different courses.
Repayment earnings threshold rises from £21,000 to £25,000
When does it take effect?
What does it mean?
You don’t have to start paying back your student loan until you earn £25,000 a year
All graduates earning above the old threshold of £21,000 will have lower annual repayments
The way the loan system works is that you repay 9% of everything you earn above the threshold. As the threshold has been raised by £4000, graduates will save £360 a year on repayments.
If you earn £30,000 per year:
Old £21,000 threshold: You paid £810 (£30,000 – £21,000 = £9,000 x 9% = £810)
New £25,000 threshold: You pay £450 (£30,000 – £25,000 = £5,000 x 9% = £450)
Saving = £360 a year
Most graduates will repay less overall
Any unpaid balance on student loans is wiped after 30 years. With the new threshold, this means that 83% of graduates will not pay back the full amount they borrowed. According to the Institute of Fiscal Studies (IFS), the higher threshold and reduced annual repayments mean a typical graduate will now repay £15,700 less of their total loan before the 30 year cut off date.
Interest charged on your loan
How it works
Interest rates on student loans are based on the
Your outstanding loan amount incurs interest during university and after graduation:
While you’re studying, interest is charged at RPI inflation + 3% (= 6.1% for academic year 2017-18)
After graduation, the rate charged is linked to your earnings:
Graduates earning less than the threshold are charged a basic interest rate equivalent to RPI (3.1%).
Above the threshold, interest rates are on a gradual sliding scale, with higher earners charged up to 3% above RPI (6.1%).
What has changed?
The higher repayment threshold means lower rates
Raising the repayment threshold to £25,000 therefore means that many graduates slip down the sliding scale and will be charged lower interest rates than they were before, reducing the overall amount owed.
Rise in interest rates
From September 2017, interest rates charged on student loans rose from 4.6% to 6.1% maximum (RPI + 3%). But this is due to the recent rise in inflation (i.e. not due to a change in government policy).
What does a change in interest rates mean?
The interest rate affects the overall amount you owe on your student loan (amount borrowed + interest), but it won’t change what you repay each year, because that is based on how much you earn, not how much you owe.
If the amount you owe increases, you could be repaying your debt for longer, but only up to the 30 year cut off point, when it is wiped.
Why you should not worry about your student loan
Many students and graduates worry about the huge amount of debt hanging over them (average £50k).
But far more relevant than the amount of money you owe, is the amount you actually repay.
It’s important to understand that your student loan is not like a normal debt, it acts more as an income tax. Repayments are calculated on how much you earn, not on how much you owe (amount borrowed + interest).
So if you don’t earn enough, you don’t repay.
If your income drops, so do repayments.
You pay back 9% of your annual earnings above the £25,000 threshold until either the outstanding amount is wiped after 30 years, or the debt is cleared before this time.
You may never pay a penny back, or you may clear the total debt…but your annual repayment will never amount to more than 9% of your income.
So high student debts are more of a psychological problem than a financial one, with many graduates feeling uncomfortable about owing large sums of money, and believing it may influence their choices on careers, living situation and other opportunities. Try to view your student loan as an investment in your future and not real ‘debt’ in the commercial sense. It is more like a graduate tax or ‘contribution’ as Martin Lewis explains in this article. In fact this topic will now form part of the imminent Government review on student finance.
Should you pay back your student loan early if you can afford to?
According to Martin Lewis (Money Saving Expert):
‘Even at 6.1% interest, it works out that the only people who should be overpaying their student loan debt are high earners, free of other debts, who’ll never want a mortgage or other loan.’
Coming soon…Government review on student financing
Theresa May has promised a full review of student financing and university funding, which will consider:
- Lowering tuition fees and varying them for different courses
- Reducing interest rate charges for low and medium earners
- Reintroducing maintenance grants for lower income groups to replace maintenance loans
- Overhauling the loan system and replacing it with a graduate tax
We’ll keep you posted, so watch this space…
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