Understanding Student Loans

Taking a student loan can seem like a daunting prospect. With headlines splattered across the media of over £50,000 worth of debt, it can seem scary, so it is important to understand the Student Loan system, what you are eligible for and how much it will actually cost you.

Money from the Government

The main sources of finances for students from the government are:

  • A Tuition Fee Loan – this is a loan of up to £9,250 a year, made to you to pay for your tuition fees and it is paid directly to the University you will be attending by the Student Loan company. All full-time students are entitled to a tuition fee loan, which is designed to cover the full cost of the university tuition fee. The loan is transferred directly to the institution that you are attending, so you never see the money. However, it is important to note that not all tuition fees are the same in every region – these vary across England, Scotland, Wales and Northern Ireland, as tuition fees vary across these locations. The maximum tuition fee loan currently stands at £9,250 and if the university you are going to charges this for your course this is the loan you will get.
  • A Maintenance Loan – this loan of up to £12,010 a year is intended to help towards your living costs whilst at University including accommodation. Everyone is entitled to a percentage of this loan, but to be eligible for the full amount you will be required to provide details of your household income. All eligible students are also entitled to a maintenance loan, which is designed to help students pay for living costs whilst at university. This loan lands in your bank account at the start of each term in the form of instalments, and you can use it however you like, but the smart thing to do is, of course, put it towards your basic living costs (accommodation, utility bills, food, savings, etc).

It’s important to note that maintenance loans are awarded on a sliding scale – the higher your household income, the less support you’ll get. Whereas students from low-income households may be eligible for an increased maintenance loan. What you will get also varies depending on the specific region of the UK. Many students find that their maintenance loan does not cover their living costs and have to either find a part-time job or get financial support from their parents.

These loans need to be paid back and you will be charged interest on them as soon as you start your course. Learn more about the loan repayment terms of the undergraduate and postgraduate loans.

Are you eligible to receive government student finance?

Loans are available from the UK government and are offered to UK/EU students studying full or part-time at an accredited UK institution. You need to be studying your first Higher Education qualification (unless you are applying for a Masters Loan).

How student loans work

Your student loan will probably be the first loan you ever take out. Owing such a large amount of money can be a daunting prospect, so it is important to understand how the loans and repayments work, so you do not spend all your time worrying about it.

If you have never taken a loan before, you may not understand some of the terminology that is used, which is where our financial glossary can come in useful to help explain basic financial concepts to beginners.

money illustration the scholarship hub

How is the loan paid?

When you apply for the tuition fee loan, the amount will be transferred directly to the University you will be attending.

The Maintenance loan will be paid in three separate installments at the beginning of each term, into your bank account.

How much interest will I be charged?

Interest will start to be charged on the loan from the date it is paid out until the date is it paid off.

The interest on student loans is calculated at 3% above the Retail Price Index, or the rate of inflation while you are studying full-time. Once you graduate, if you earn less than £25,000 you will only be charged interest at the RPI. Once you start earning over £25,000 the % interest above the RPI increases as you earn more money, up to 3% when you earn £41,000 or above.

As an example, the current if the RPI is 3% this means that you would be charged interest at 6% (3% +3%). These rates are calculated from the date your loan is paid out and change annually based on the RPI of the time.

How do I apply for the loan?

All the applications for student loans are handled by the Student Loans Company but you can learn more about the application process here.

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How do I repay the loan?

You only start repaying the loan from the April after you graduate if you are earning £25,000 or more. If you are not, then you do not start repaying the loan until you are.

The amount you pay is calculated at 9% of the money you earn above £25,000. So if you earn £26,000 you will pay 9% of £1,000 or £90 a year. If you earn £30,000 you will pay 9% of £4,000, which makes an annual repayment of £360. Divide these figures by 12 and you will get the amount you will have to pay back each month.

The monthly repayments will be taken directly from your salary before it is given to you, so you will never see that money and won’t be able to spend it!

Should I pay the tuition fees upfront if I have the money?

If you have the money to pay the tuition fees, it is not necessarily a good idea to pay them upfront.

As we have seen above in the section “How do I repay the loan?” the amount you pay back depends on how much you earn when you graduate and not how much you actually borrowed. This means that if your salary doesn’t increase greatly or at all over the next 30 years – say you enter a profession where there is a ceiling on your potential salary – you could find that you do not actually need to pay the full amount back. The loans are cancelled out after 30 years, which means that using the scenario above, where you earn £26,000 and are repaying £90 a year, if this didn’t change you would repay £2,700 over 30 years.

Now hopefully, going to University will mean that you do get a better paid job, and that in turn means that you will need to pay more of the loan back, but until you know what your job prospects are, you may be better off to invest the money you have elsewhere and sit tight before you consider paying it off.

Although you will be accruing interest on the loan, you will also be accruing interest on the money you have invested, and whilst they may not balance each other out, in the long term it could save you a lot of money.

Should I pay the loan off if I have the money?

Once you have graduated and you start earning money, you will have a clear idea of how much your monthly repayments are and how that affects your monthly budget.

The thing to remember about paying off your loan is that the interest charged on student loans is relatively low compared to other commercial loans, so if you are likely to want to borrow money for other things, such as a car or a mortgage these will cost you far more than the student loan. Therefore by putting the money you have towards reducing those debts is a better proposition than using it to pay off the student loan.

If you find yourself in the fortunate position of having the money and you do not envisage that you will need to borrow money for anything else, then it would make sense to pay off the loan. There are no early repayment penalties on a student loan as there are on mortgages.

Useful Link

The Student Loan Company – https://www.slc.co.uk/

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