Student loan interest at 12%

[AntikytheraMech]

Today's release of RPI and CPI figures mean that the student loan interest will be 12% moving forwards.
This will affect income, as well as borrowing capability when DS leaves university and wants to get a mortgage.
Am I right in my assumption?

I don’t think it’s included in the affordability criteria for a mortgage, not that that’s much consolation. It’s worse that the government can just decide to increase the payments on a whim by not increasing the threshold for repayments and taking payments for longer. How can it be legal to offer a financial product and change the terms once it’s been agreed to. Quite apart from the fact that lots of loans are aimed at 17 year olds. Awful. Sorry, not much advice but it’s shit. Private loan providers will be introduced once the middle classes self fund in larger numbers and there is no incentive for politicians to offer government loans.

It doesn’t affect borrowing capability at all.

Why doesn’t it affect borrowing capability? I realise that’s student debt is seen differently from other forms of debt, but repayments make a difference to take-home pay and thus to borrowing capacity.

I am dismayed by this news that students face rising interest rates. Especially the ones who have had limited teaching during the pandemic, and fewer opportunities. It seems brutally unfair.

It DOES affect borrowing capability. On our last house we had sudden flurry of emails from the mortgage advisor saying they made a mistake, because of our student loans being repayed every month it was counted, quite rightly, as extra outgoings and the amount they would lend went down. Not by a huge amount but still went down.

Remortgaging at the moment. Doesn’t affect it at all by going up, they just ask you if you have a student loan and what plan it is to check your affordability/you have to pay it (same impact if you had a phone contract and had to pay that. It’s just so they know)

. It’s the interest in the total loan that’s gone up (yay). This doesn’t change the % that we pay back, just means it has less of an impact (as in you’re paying back less than the interest accrued in the year).

Hope it makes some sense?

It’s shocking - whilst the difference in ‘real terms’ is minimal, it essentially means you’ll have a generation of graduates who will never pay back their student loans.

The hardest hit being ‘middle earners’ such as nurses and teachers from poor backgrounds.

Super high earners may still clear it, and ironically pay less back than a nurse paying £50pcm for their entire working lives.

This is usury

It doesn't count as a true debt when applying for a mortgage, no. They take account of your monthly repayments as part of your outgoings, but don't consider it as part of your debt burden like a normal loan - i.e. they won't say 'Well you already have a debt of £40k, so we can't give you a mortgage'.

At the moment it isn't included as a debt when calculating how much you owe for mortgage purposes BUT it does affect for available funds you have each month to service that mortgage.

TBH I am concerned that in the future it will be included in calculating debt for mortgage purposes. I don't trust this or any future government not to change the rules again to the detriment of students.

We can borrow for substantially less for a fixed rate on a fixed term and are seriously considering this with the agreement that our children will (effectively) take over the debt when they graduate as they will have high earning potential.

@woulducouldushouldu

At the moment it isn't included as a debt when calculating how much you owe for mortgage purposes BUT it does affect for available funds you have each month to service that mortgage.

TBH I am concerned that in the future it will be included in calculating debt for mortgage purposes. I don't trust this or any future government not to change the rules again to the detriment of students.

We can borrow for substantially less for a fixed rate on a fixed term and are seriously considering this with the agreement that our children will (effectively) take over the debt when they graduate as they will have high earning potential.

I should add that we are the lucky ones who can do this. I feel sorry for families who are not in our position

It’s disgraceful. There should be a cap.

TBH I am concerned that in the future it will be included in calculating debt for mortgage purposes. I don't trust this or any future government not to change the rules again to the detriment of students

Although technically possible for rules to be backdated, politically it's a big no-no. Indeed the most recent changes will be applied to 23/24 cohorts and not earlier ones which demonstrates this.

@sashagabadon

It’s disgraceful. There should be a cap.

And there will be for the 23/24 and later cohorts.

It is a complex set of calculations as you pay 9% of salary over the threshold no matter how big or large the amount of the student loan that you have. Some people never pay a penny back so the loan is a gift. Others pay a lot back.

(I paid my children's fees instead of their taking out the loans)

Different terms are being imposed on the 2023 cohort anyway, in the form of a 40 year repayment rather than 30.

Like you Xenia we are paying in full for all our DC, and feel very grateful to be able to do this for them.

It’s all quite hard to get one’s head around, isn’t it. A higher interest rate won’t change how much ex student pay each year as that depends on their earnings. And if their level of earnings over their careers is such that they weren’t going to pay the loan back in full, the nee interest rate has, I think, no impact on them at all. So it hits the people who would have managed to pay it all off before the term out but who now will have to keep going for a few more years, and those who decide to pay it all back early just after graduating, as I know some parents plan to do eg if it turns out they get going on a high paying career path.

ifs.org.uk/publications/16024 provides a summary of the position

From the opening summary section

English and Welsh graduates who took out a student loan since 2012 are in for a rollercoaster ride on student loan interest rates in the coming years. Today’s reading for RPI inflation means that the maximum interest rate, which is charged to current students and graduates earning more than £49,130, will rise from its current level of 4.5% to an eye-watering 12% for half a year unless policy changes (the interest rates for low earners will rise from 1.5% to 9%). This means that with a typical loan balance of around £50,000, a high-earning recent graduate would incur around £3,000 in interest over six months – more than even someone earning three times the median salary for recent graduates would usually repay during that time.

The maximum student loan interest rate is then likely to fall to around 7% in March 2023 and fluctuate between 7 and 9% for a year and a half; in September 2024, it is then predicted to fall to around 0% before rising again to around 5% in March 2025. These wild swings in interest rates will arise from the combination of high inflation and an interest rate cap that takes half a year to come into operation. Without the cap, maximum interest rates would be 12% throughout the 2022/23 academic year and around 13% in 2023/24. While interest rates affect all borrowers’ loan balances, they only affect actual repayments for the typically high-earning graduates that will pay off their loans.

This interest rate rollercoaster will cause problems. The way the interest rate cap currently operates disadvantages borrowers with falling debt balances for no good reason. Perhaps more importantly, sky-high interest rates may put some prospective students off going to university; some graduates will likely feel compelled to pay off their loans even when this has no benefit for them.

I think if you are on £30k a year for life as a teacher for example and have £50k of debt you currently might pay something like £500 a year back until the end of your period for the loan. In other words not large. If you marry and stop work or work in a family business with relatively low salary or never work then you pay nothing. If you are on £100k a year by 30 you might well be paying 9% of your earnings over £23k or whatever the new ceiling is so the it gets a bit more.

The maximum student loan interest rate is then likely to fall to around 7% in March 2023 and fluctuate between 7 and 9% for a year and a half;

This is an important point and needs to be highlighted. From March, a new cap is coming in which stops the rate from being above commercial rates. It's just a shame about the timing! More info here:
www.bbc.co.uk/news/education-61088025

@WellBeyondFedUp

It doesn’t affect borrowing capability at all.

I am sure this isn't true. Banks look at your outgoings when looking to see what you can afford to repay. They can't ignore a massive chunk going out on student loans!

It’s not a massive chunk though.

Most lenders allow for discretionary spending if something like £800 a month per person, and student loans come under this. So, if your student loan has truly decreased the amount you can borrow, then you must have quite a lot of other spending commitments that are also being taken into consideration. It won’t be the student loan itself.

Those expecting to be high earners after uni should defer to 2023. They will save on repayments if they do.

I think if you are on £30k a year for life as a teacher for example

By 2023, that will be a teacher's starting salary (if the DfE delivers on its promise), and it already is £30k in London..Even if you were never promoted you would receive incremental pay rises up the salary scale, and inflationary rises. In practice, if you're a decent teacher you will probably be promoted and/or taken on additional responsibilities with experience. In the meantime, the £27k repayment threshold is likely to be frozen until the Government is satified that a much higher proportion of graduates repay their loan in full. After all, from the Government's perspective, its an expensive loan scheme if the majority of graduates never repay the loan.

I think the mantra that "most don't repay in full" will soon be turned on its head.

Also, anyone who occasionally works longer hours, or who is on any kind of bonus scheme is likely to pay more than they expect because the repayments are based on weekly, not annual, earnings: www.moneysavingexpert.com/team-blog/2018/12/student-loan-borrower--why-working-extra-shifts-or-getting-a-bon/

As a tax payer who thinks tax is far too high I would be delighted if every student paid back every last penny of course. Similarly when I went to university only 15% of people went and 85% of people were paying through their tax for something they didn't get to do.