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Should you worry about your student loans?

The majority (50.2 percent) of young people in the UK go to university as of 2017/18, according to the Department of Education. The vast majority of these take out a student loan to pay for this, making these loans a big issue for a lot of people.

Tuition fees have long been controversial, having caused riots in 2011 when the coalition government announced they were raising fees to £9000 from £3000. This decision caused a lot of anger and many have become very anxious about affording university.

Student loans are a worry for many graduates.

But student loans aren’t quite as simple as they appear to the naked eye. You really don’t need to worry about them in the way you would any other debt. In this post, I will aim to explain:

  • How student loans work
  • Whether it is a debt
  • If there is a need to repay them ASAP
  • Why there’s been so much fuss about them this week

What is a student loan?

A student loan is available to students who are UK nationals or permanent residents in the UK, Channel Islands or the Isle of Man. The loan comes in two parts: tuition fees, to cover the cost of your course, and maintenance loan, designed to cover your living expenses while you study.

Tuition fees are now capped at £9,250, while the maintenance loan is dependent on your main household’s income. If you live away from home outside London you could receive up to £9,203 a year, while if you’re living in London you could receive up to £12,010.

This means a student at a university outside of the capital receiving the maximum loan will have a balance of £55,359 (excluding interest) at the end of a three year course. You can work out exactly how much you need to pay via the official website and the statements you will be sent every six months. There is also a student loan repayment calculator which could help you work out how much you need to pay. https://www.student-loan-calculator.co.uk/

Being such a large sum, it’s no wonder so many people are spooked by it, but you really don’t need to be.

Is it a debt?

Not exactly. Yes, there is an amount you owe and the figure can seem pretty daunting when the bi-annual statements arrive. Often the figure will grow rather than fall due to interest despite making payments. Currently, the interest rate is 5% while studying and then 2.4% if you’re earning less than £26,575. For salaries above this you can expect up to 3% extra interest to be added.

However, the sum is not counted as a traditional debt. It does not have a negative impact on your credit score. This means it will not count against you if you’re looking to buy a house or get a loan. Also, your requirement to pay depends on your salary, which means you should never have to pay more than you can reasonably afford.  You can find out how much you will pay when earning your current or target salary using the student loan repayment calculator.

Additionally, providing you are payed by PAYE, the repayments come straight out of your pay cheque, pre-tax. This means you have no choice but to pay the required sum. However, you shouldn’t find yourself struggling to make the payment on top of your bills and other expenses.

Should I repay my student loans ASAP?

The figure may look daunting, but there really is no rush to pay as much as you can straight away. Unless you are certain you will earn enough to pay off the whole loan and interest in 30 years, there really is little point in paying more than you are required to.

In fact, by making overpayments you could end up paying far more than you need to. Martin Lewis, founder of Money Saving Expert, warned: “unless you’re making huge overpayments, for most people overpaying does diddly squat – you’ll still continue to repay 9% of everything over the threshold for 30 years. Overpaying is a total waste of money.”

As mentioned earlier the student loan repayment calculator will tell you how much you are required to pay each month. When you’ve just graduated this is likely to be a very small amount, if any at all. Over 80% of graduates don’t earn enough in their first year after university to make any payments. There’s a lot of expenses and pressure associated with starting your first job and leaving university. Paying your student loan off shouldn’t be one of them.

Why has there been so much fuss about student loans recently?

While they’re never far from the headlines, student loans have been back in the news again this week (20/07/20), largely due to Martin Lewis raising the alarm.

The Student Loans Company has recently moved its website from SLC.co.uk to Gov.uk, which has prompted changes to its appearance and layout. Having been described as “concerning and irresponsible”, there is now the option to make ‘quick repayments’ without logging in.

For a lot of graduates, making extra payments won’t make any difference to what they have to repay in future.

For a lot of graduates, making extra payments won’t make any difference to what they have to repay in future. Therefore, making unnecessary repayments is essentially just throwing money away. This is something to be really careful about, as once voluntary overpayments are made, they cannot be undone.

The system was live for over a week with no warning about the danger, until it was brought to the attention of the Student Loans Company by Martin Lewis and the Money Saving Expert team. They have since added some warning to the text. But it is still very prominent and dangerous to graduates, many of whom are deeply concerned about the ‘debt’ their owe.

Once logged in, the new Gov.uk site has the large overall ‘debt’ figure as the focus. This reinforces the idea that the ‘debt’ is damaging and needs to be repaid as soon as possible. This could scare graduates into making repayments that aren’t in their best interests and leave them worse off. Their money could be better spent on their saving goals or putting down a deposit on a house.

If you’re still worried…

If you find yourself concerned, you should check the student loan repayment calculator first and see what you’re actually required to pay. Think carefully before making any rash decisions about payments because it may leave you worse off in the future.

If you found this post interesting, please like it and share across social media or send it to your friends. I’d also love to hear your thoughts and experiences, so please do leave a comment! What do you think about student loans? Are you in a rush to repay them or are you planning on sticking to the required sums?

By The Twenty Percent

Hi I'm Katie and I use my blog to help young people take control of their personal finances.

5 replies on “Should you worry about your student loans?”

Not going to lie, as an American, this post made me very jealous! Our tuition fees are outrageous, particularly now as many students aren’t even able to learn on campus and are still getting charged extra fees! It is very sad because the cost of education really does end up creating a greater financial divide and makes it harder for families to provide for themselves. I hope things change soon, there is a lot of talk going on in the states about forgiving student loans… we shall see!

Hi Katie. Very interesting read (I went to uni many years ago – and actually received a grant to do so rather than having to take out a loan!). And I completely agree with the suggestion that there is no (financial) advantage in trying to pay off the loan early – so many other calls on your money after leaving uni that student loan repayments really should be at the back of the queue!

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