Despite a number of significant changes to student loans in recent years our attitudes towards repayment appear to have changed little. Most of us are content to leave it to our employer to make the deductions, often not checking the outstanding balance to understand where we are or whether those deductions have been correctly processed against our loan. (I have personal experience involving a year’s worth of repayments not being passed on to the Student Loans Company, so make sure you are looking at your statements people!)
I went to the University of Birmingham in 2004, at a time where tuition fees were just over £1,000 per year. Fast forward 2 years and fees tripled to £3,000 for those starting courses in 2006. Six years later fees tripled yet again to £9,000. Many have asked whether they would still go to university as the increase in fees hasn’t been matched by significant movements in the UK average graduate salary. However that is a whole other story, one which would be a post in itself.
How do student loan repayments work?
Unlike US Student loans, the repayment of UK student loans is linked to how much you earn. Graduates are not required to make repayments if they do not earn above the relevant income threshold. These thresholds have increased over the years going from £15,000 in April 2005 to the current threshold of£21,000. Repayment is set at 9% of above threshold earnings before tax.
Why could a change in approach to student loan repayment be required?
This is less of an issue for those under older loan structures, however if we look at those who started degrees from 2012 onwards:
The amounts currently being borrowed are much larger
With the hike in tuition fees students are taking out loans to cover both fees and living costs. So with tuition fees of £9,000 per year and a maximum maintenance loan of £5,740 that’s almost £17,000 of debt per year. Factor in that most degree courses are 3-4 years in length we are looking at loans of up to £68,000 (more for longer courses such as Medicine).
Compare that to the time of £1,000 tuition fees (no loan as it was paid either by you/parents or your local education authority), even with the maximum maintenance loan of circa £5,000 the debt accumulated over the span of a degree is £15,000 – £20,000 – less than a third under the current system.
The interest rates charged have changed
Under the pre-autumn 2012 system, loans will incur interest charges of 0.9% for the foreseeable future. Interest on post – autumn 2012 loans is variable based on RPI Retail Prices Index – a measure of inflation.
At the top of the sliding scale (3.9%) the rate of interest exceeds a number of first-time buyer mortgage interest rates, which could result in student loans no longer being the cheapest debt graduates hold. In addition to this the varying nature of RPI means that interest charges will change from year to year – the current 0.9% is based on last September’s RPI. April 2016 RPI is 1.3%, if this remains unchanged that could mean an increase in interest charges of up to 4.3%!
Some graduates have argued that they didn’t fully understand the financial commitment that they were making under the latest fee structure. One graduate’s letter to his local MP (copying in the Prime minister – as you do) has done the rounds on Facebook with claims of student loans being mis-sold. Here’s a snap shot of his loan statement (anyone under the old style loan will gasp at the interest). From January 2015- March 2016 alone he’s been charged roughly £1,800 in interest!
The terms have already been changed once
The government previously committed to increasing the repayment threshold in line with inflation. However 2015 saw the threshold frozen at £21,000 for the next 5 years. So what’s the big deal? This will result in increased repayments for graduates over the years as their salaries increase with inflation making it more likely to exceed the threshold, despite its purchasing power being lower.
With this change occurring after the loans were taken out, could there be further changes on the horizon?
So with this in mind, is it time for recent graduates to abandon the off-handed approach adopted by most graduates under the old system? For those who started courses after Autumn 2012 the higher loan value and interest rates could easily see debts spiral out of control. With the possibility of changing terms – is it time to adopt a similar approach to those stateside (pay down student loans asap)? Or should new graduates take comfort in the fact that debts are written off after 30 years? Let me know your thoughts.
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