What Are Student Loans?
For the overwhelming majority of students, student loans represent the largest form of credit one has accessed up until that point in their life. This is while a lot of these same students simultaneously don’t understand the amount they get, and how it’s repaid. This article looks to answer these questions.
Student loan in the UK is provided by the government through Student Finance England (SFE) and is established to finance the two major costs of student living: tuition fees and living costs. Eligibility for student loans from SFE is dependent on the applicant fulfilling the following criteria:
● Be a UK national or have settled status
● Normally live in England
● Have lived in the UK for 3 years prior to the course beginning
● Study at an eligible UK College or Universit
● Have this be their first Higher Education Qualification
Student loan sums up to be the total amount a student borrows for the Tuition Fee Loan (up to £9250/yr) which is paid directly to the university, as well as the Maintenance Loan, which covers living costs such as books, rent and travel. The value of this maintenance depends on their household income and the location of their study. For instance, a student living away from home, studying in London, and having a household income of under £25,000/yr is entitled to more maintenance than someone of the same background studying outside of London, due to the higher costs of living in the city.
Grants are also available to support disadvantaged students which do not need to be paid back at the end of the course. These include; Disabled Students’ Allowance, Adult Dependants’ Grant (a grant available to you if there is an elderly dependent in your life), and the Childcare Grant (given to full-time students with young children).
Grants act differently from loans in the fact they don’t need to be paid back, but SFE will have to. This will come with an interest rate attached to it, unfortunately raising the overall cost of repayment on the loan.
The interest rate attached to the loan varies when you study and when you are working. During the years of study, the interest rate of the loan is Retail Price Index (RPI- a measure of inflation based on the price of weighted goods in the prior year) plus 3%. In 2020, this value was 5.6% as RPI was 2.6%. After graduation, this interest rate depends on the student’s income. If they earn below £26,575/year, the interest rate is just the value of RPI. Then from £26,576/year to £47,835/year, the interest is RPI plus up to 3%, with it going to RPI plus 3% at any income over £47,835. It is important to communicate your income with SLC correctly as otherwise one may be forced into paying ‘RPI + 3%’ due to lack of evidence of earnings.
Student debt is a unique loan type as, despite its size, it does not affect credit scores and is automatically deducted from one’s salary. The debt is also cancelled after 30 years of non-repayment which allows for some flexibility when repaying.
Repaying Student Loan
A student will only start repaying their loan from the April of the year following their graduation and only if they are earning a taxable income of at least £26,575/year.
They are required to pay 9% of the amount of the income over the threshold. For instance, somebody earning £5000 over the threshold at £31,575 is required to pay 9% of £5,000 which is £450/yr. Importantly, this shows interest rate has no impact on the amount you pay back as it is fixed at 9% of earnings over the threshold.
As the average student loan debt for England graduates in 2020 was £40,280, the majority of graduates will end up not paying back the entirety of their loan within 30 years under the given repayment structure and thus the majority of loans will most likely be cancelled.
In this way, student loan debt often acts as a fairly insignificant tax as opposed to a strenuous debt repayment that it can be reported as.