Student Loans Debt!(68 Posts)
So a friend of mine's son is going to university in September of this year. She asked me my opinion on how much his student loan debt is going to affect him throughout his post-uni life and honestly I wasn't sure!
I used this: www.helpwithdebtconsolidation.co.uk/you-vs-the-nation/index.php
He's going to owe around £35,000 of debt and according to this tool, if he wants to pay it back in 10 years it'll cost him £656 a month! That's a crazy amount of money! Am I missing something here?
Student Loans are not like other debts, think of them as a % deduction like tax and NI as repayments, linked to income rather than a debt to be paid in a fixed time.
In fact, everyone knows that a significant amount of people will not pay it all back at all.
Have a look on https://www.gov.uk/student-finance - There it gives all the information about repayment terms. Then cross reference on a student forum website - for the small print. Also at his current school they will give quite a lot of information about the process of student loans and repayment structure, maybe you could contact them
As creamteas says student loans are not like other debt. You don't start paying back until you are earning £21k a year for a start and it isn't held against you as debt when applying for a mortgage etc. etc. A debt consolidation website is thinking of very different sorts of debt such as credit cards, car loans and stuff.
Even if he was earning over £60k he would only be paying back £292 or some such a month.
Student loans are not debt, they are a graduate tax of 9% on above median earnings.
It sounds a lot, but a lot of people will be in a similar position. The amount I owe in my mortgage freaks my parents out and the amount my DC will owe in student loans will freak me out equally.
Best way is to look at it as a graduate tax. When I finished my degree, income tax was 30%. Taxes are lower now, so whilst our offspring have more "debt", the amount they're paying in tax is lower.
Anyone who can scrape together the money for tuition fees, would be better to take out the tuition fees loan and keep the cash for a deposit for a house in due course.
One of the experts on Money Box, on radio 4, said that to have to pay back the full loan you would have to start on a significantly higher than average first salary (I think it was in the mid £30k, maybe higher), get above inflation pay rises every year without fail, and never ever take a break from full paid work. So no maternity or paternity leave, no period of unemployment or sickness and no sabbatical or being a sah parent.
They said the worst thing you could do was think about paying it back early, unless the above applied to you- and there really isn't any way you could know that in advance.
It's hard to get your head around but it is nothing like ordinary debt. You don't declare it for mortgages, they don't put anything on your credit file, it's just a % of a small part of your pay which you never see so you never miss.
It is not a loan in any normal sense of the word. As TalkinPeace says it is a graduate tax but with a ceiling on the total amount paid over the graduate's lifetime. I also agree with the expert on MoneyBox - for most graduates it does not make financial sense to pay it off early.
For mortgage calculations they are not counted as debt, but as a reduction in income.
I've started looking long and hard at the numbers - as they are looming in a couple of years
it makes absolute sense to borrow the maximum they will allow you
it makes absolutely no sense to repay it early
(contrary to every iota of general advice you'll see me giving on the debt threads!)
As others have said, student loans aren't like other debts - they function more like a graduate tax. You only pay back 9% of anything you earn over £21,000 per year. If you don't earn >£21k, you don't pay anything back. After 30 years, any outstanding balance is wiped. It doesn't affect credit ratings or mortgages, and bailiffs will never turn up on your doorstep.
Earn £20k a year, pay £0
Earn £25k a year, pay £360 per year
Earn £40k a year, pay £1710 per year
These are not huge sums in that context - and most people will never pay off their full student loans.
There's a useful little calculator here that shows what you can expect to repay over the whole 30 year period www.moneysavingexpert.com/students/student-finance-calculator
DS1 hopes to start a 4 year degree course in October. He will come out owing £56K.
I understand all of the financial arguments about it being a tax but my instinct screams against it. I have never borrowed money other than a mortgage which was paid off years ago. DC brought up to save not borrow.
What makes it feel more like a debt than a loan is the punishing interest rate that gets added from day 1.
We are not rich but we could pay up front. We have decided not to do that. We'll see how the land lies when both DC are through the other side and, depending on the situation then, will probably use the money to help them buy a home rather than pay off the student loan.
the punishing interest rate
you find another unsecured loan that has a LOWER rate than RPI plus 3%
Right. You make a point that "Many will not pay off loan" That frightens me . I tell you why Talkinpeace take note: Student Loans could end up being a "Ponzi" scheme and Collapse on its self. Therefore the Student Loan Company which is now a private Company will need to look at ways of getting their "Money" and will try to change the terms. Perhaps one term could be linked to "Property Value of parents home" or "Graduates" first home or "Inheritance" from parents being forced to pay up.
This is conjecture but people need to be aware that Student Loans in their present state don't add financially. ( They cant) someone who Owes £50k paying back £30 A month , its not going to Survive present terms.
the terms of the loans cannot be altered at a later date cf pensions
the whole Student Loan scheme is a form of off balance sheet government debt
I don't have any loans Talkinpeace, that was my problem with treating this as a tax and not a loan. I have no idea what interest rates for borrowers are but RPI +3% seems a lot to me.
Talkinpeace. Is that "Statute" In Law.
Why did the private Company Buy the Loan Book, if they Can't make Money ?.
Who Knows what may happen in the future, under pressure from a Private Company.
As for "Off Balance Sheet Debt" , that is what sunk Fannie/Freddie in America.
I really hope you are right Talkinpeace, at the present terms it makes all sense to borrow what you can , however things and times do change.
RPI +3% seems a lot to me
you are lucky to be so rich that you have never looked at the interest rates on things
Whoseturnist. You could not get any Unsecured loan for anything like that.
That is not the point because you could for instance get a Car Loan from someone like "lombard" for about 4% based on a reducing balance .
The other problem is RPI ( Retail Price Index) if Inflation goes up to 6% what will RPI be added to 3% you could suddenly be paying 10% Interest on the loan.
The truth though is that students are just going to have to see it as a "Insurance" policy that offers a chance of a career.
You are working on a false premise. The Student Loans Company is a non-profit making organisation wholly owned by the government. It is not and never has been a private company.
It is not in any meaningful sense of the word a loan. The interest rate you describe as punishing is in fact very low for an unsecured loan, especially where the recipient of the loan has no income. Something like three times that would be normal. Unlike a normal loan you don't have to start paying it off straight away. You don't pay a penny until you are earning at least £21k. Unlike a normal loan it doesn't appear on your credit record. And unlike a normal loan any outstanding amount gets written off after 30 years even if you haven't paid a single penny.
That is not the point because you could for instance get a Car Loan from someone like "lombard" for about 4% based on a reducing balance
That is entirely the point. You are comparing apples with oranges. Lombard only lend to businesses and the loan would be secured on the car, as would any car loan.
The other problem is RPI ( Retail Price Index) if Inflation goes up to 6% what will RPI be added to 3% you could suddenly be paying 10% Interest on the loan
6% plus 3% is 9%, not 10%. But the important point is that your repayments would not be affected. They would still be 9% of anything you earn over £21k (and that threshold gets adjusted by RPI every year).
Do the older style student loans get wiped after 30 years too?
The really old ones (with the stuff all interest rates) never get written off.
The ones that get written off are the RPI plus 3%
and that is only after 30 years
You do not seem to grasp that once a loan has been taken out, the contract on that loan is binding until its completion.
THe lender cannot change the terms on that one
but they will on later ones.
The best/worst example of government off balance sheet finance is the PFI schemes that are currently sinking the NHS
I honestly don't understand why people worry about student loans so much, obviously it's not nice having debt but it's not like real debt is it?
I have student loans. £30 a month comes straight out of my wage. That's that. I'll probably be dead before it's paid off, then it's gone.
No. Loans taken after 1st September 2006 get wiped after 25 years. Loans taken before that date continue until the student is 65, dies or is permanently unfit for work through disability. The repayments for older loans are 9% of earnings over £16365 rather than £21k. Both thresholds go up in line with RPI.
I chose to pay the older children so as not to hav loansl. of course I know the arguments for and against. For me the psychological issue of not having debt was important. Given my daughters earn in their 20s just under £100k and the other over £50k+ I suspect we are the sort of family (as we don't take maternity leaves etc) where we would be paying back all the loan and I have been happy fund them at university but only on the basis they graduate debt free.
However most women stop work and go back on pin money for the rest of their lives and live off male earnings and most people of either sex never earn much about £25k so for them certainly it may well be wise to take the loan.
When my daughters recently applied for mortgages the questions certainly include things like how much student loan you are paying back, how much your gym membership costs etc.
So if our child in its 20s were on £100k it would pay £7110 a year (repayments at 9%) until the loan was repaid?
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