6 Student Finance myths debunked
We hear a lot about Student Loans and interest rate increases in the media. But what does it actually mean? We debunk some of the most common Student Finance myths…
Student Finance is complicated enough as it is. It really doesn’t help when incorrect info is thrown around.
In our Student Money Survey this year, we found that two in five students don’t understand their Student Loan agreement. On top of this, almost half worry about paying it back.
Arming yourself with the facts when it comes to this stuff is extremely important. For many young people, it can even determine whether they go to uni at all.
And while we don’t agree with many aspects of Student Finance, the situation often isn’t as bad as it first seems. This guide will help you separate fact from fiction and explain how Student Finance actually works.
6 misconceptions about Student Finance
Here are the most common myths about Student Finance, with key facts and info to clarify them:
1. UK student debt is the worst in the world
This is something we see thrown around a lot in the media, but please don’t let this scare you. Tuition fees in England are some of the highest in the world. However, the way that we pay for university here is different from many other countries (like the US). So, it’s not really a fair comparison. Tuition fees here are high (too high, in our opinion). But, you don’t have to pay anything upfront and Student Loans are funded by the government.
As you’ll see below, the repayment terms are manageable and won’t affect your credit rating. Plus, the chances are, you won’t end up paying it all off before it’s wiped. In contrast, private Student Loan lenders in the US are notoriously unsympathetic to students’ personal circumstances. Six months after graduation, they’re knocking on your door looking for repayments whether you can afford them or not.
2. You need to be wealthy to go to university
While tuition fees are now over £9,000 a year for most UK students, and you’ll need to pay for living costs on top of that, you don’t need to pay anything upfront. The government will cover your tuition fees with your Tuition Fee Loan. You can also get a Maintenance Loan to cover your living costs. The lower your household income, the more money you’ll receive as a Maintenance Loan.
This is because Student Finance understands your parents might not be in a position to financially support you at uni. This does mean those from lower-income backgrounds graduate with more debt than those from wealthier families (and so will accumulate more interest). However, current repayment terms mean it’s unlikely you’ll pay off the loan in full before it’s cleared in around 30 years.
3. More debt means higher monthly repayments
What many don’t know is that, although the increase in tuition fees means you’ll graduate with more debt, you’ll actually pay back less each month than students did previously. This is because how much you repay each month depends on how much you earn, not how much you owe.
English and Welsh students who went to uni after 2012 currently only repay 9% of anything you earn above £27,295. Note that this is NOT 9% of everything you earn, as is sometimes reported.
For students from Northern Ireland (or English or Welsh students who started uni before 2012), the threshold is currently £20,195. For students from Scotland, the threshold sits at £25,375.
4. You’ll be paying off student debt your whole life
No matter how big your student debts are, if they’re government loans (including the Tuition Fee Loan and Maintenance Loan) and not loans from a private lender, they’ll be wiped after approximately 30 years (depending on what plan you’re on). If you go straight into uni from school at 18 and graduate at 21, this would mean your repayments will stop by the time you’re 52 (repayments start the April after graduation). This is even the case if you’ve barely made a dent in repaying them. Find out how much of your loan you’ll have likely paid off before it gets wiped using this Student Loan repayment calculator.
5. You should pay off your Student Loan as soon as possible
The decision of how and when you repay your loans is entirely up to you. However, it’s not necessarily worth trying to repay your loan early. Repaying early would reduce the amount of interest you pay overall. But in most cases, it’s unlikely you’ll even start paying off your added interest before the debt gets wiped. So, if you try to pay your loan off quickly, you could end up paying off money that you wouldn’t have paid back otherwise.
For those who have serious hopes of becoming a millionaire with a mega salary once you graduate (in which case you’ll probably be on track to pay off your loan in full before the 30 years are up) – why not look into investing your cash instead? If the interest on your loan is growing at a rate of 4.5% (which is the current rate for high earners on Plan 2), you might feel pressured into paying the whole thing off if you’ve got the money. However, a savvy investor could easily get a return of 7%+ on that cash. It’s definitely something to think about. For more guidance on how quickly you should repay your loan, check out our guide to understanding your Student Loan repayments.
5. All universities are allowed to raise tuition fees
Back in 2012 when tuition fees had a big increase, we were all told that only the top unis would be charging £9k. But as we all know, everyone ended up jumping on the bandwagon and charging full whack. Some people worry that a similar thing could happen again. But as things stand, universities are only allowed to increase tuition fees in line with inflation. This is why fees increased from £9,000 a year to £9,250 a year in 2017/18. In 2019, the Augar Review suggested universities lower tuition fees from £9,250 to £7,500. However, it’s been announced that tuition fees will remain capped at £9,250 up to and including the 2024/25 academic year.
6. The government keeps changing your loan’s interest rate
Understanding the interest rate on your loan can be a total headache. It’s very common for students to get this bit wrong. An example of this was when a graduate’s letter complaining about the unfair interest on his Student Loan went viral. But as we pointed out, it was factually incorrect. The maximum interest that the government can currently charge on Plan 2 Student Loans is RPI+3%. However, RPI naturally goes up and down over time. So, when you read about Student Loan interest rates going up, that’s not generally because the government has changed them.
It’s usually because RPI has gone up with inflation. Having said that, though, the government has announced changes to how interest will be applied to Student Loans in the future. Find out more in our article about the Student Loan changes.
