Student Loans - a question of interest

[booklover789]

Our DC is off to Uni and plans to take out a student loan for fees. I've read that interest on that debt (currently around 6%) is charged monthly, and that the interest starts from the moment you take out the loan.

I can't believe that's true, as 6% a month interest every month for 1 year would lead to that £9k of debt becoming c.£18k of debt in 12 months!? I've clearly got the wrong end of the stick here. So...

Can anyone help me, as I'd really like to know what a £9k-a-year loan actually looks like by the end of year 1 of study?

Or to put it another way: if a DC takes out a £9k Student Loan every year for 3 years - at, say 6% interest - how big is that total debt by the time they leave Uni?

All help gratefully received!

Yes that's correct - Interest does start to be accrue from the day the loan is taken out. It's no unusual to graduate with over 50k in student debt these days.

The interest is annual, not monthly. So they'll be charged 12/ 6 percent each month E.g around half a percent

That's v good to know, Meltingsocks. Phewey. V pleased to see that it eventually gets to 6% by the end of the year. Thank you so much for your answers.

@booklover789 all explained here www.gov.uk/guidance/how-interest-is-calculated-plan-2

Is your DS starting this year or September 2023? Because everything is changing for those starting next year....

Starting this year, @Seeline.

Yes, the 6% is the ANNUAL interest payment. Given that inflation is double digit, that's a Tay negative real rate of interest!

Actually (not Tay)

@booklover789
You have to factor in though that the loan is over a very very long period and depends on income. Most grads just pay a monthly amount. It can be pretty minimal payments. Also it’s written off. So huge numbers don’t pay much at all, especially SAH parents and past time workers. Millions have the loans so interest is immaterial if you cannot pay up front. Most cannot. So what’s the point in worrying?

Did you not go to any university finance talks?

At Open Day time, inflation was running about 2%, so not same situation as now.

Oo that hadn't occurred to me, @Lilacsunflowers - what a great point, thank you .

@Ragged
Yes. But the rate of interest charged can be varied by the government.

Well that's a very optimistic way of looking at it, but the Govt wouldn't have capped the interest rate at 6% if they thought the current double-digit inflation rate was going to continue for the lifetime of the loan - they will do all they can to bring the inflation rate back to 3% where it was a few months ago, and if inflation does continue at its current rate, grad starting salaries will rocket, so they'll have no qualms in raising the ca eventually.

OP you could look at MSE's calculator here: www.moneysavingexpert.com/students/student-finance-calculator/. But you'll need to change the default assumptions for current conditions and your best guess at your child's future earning potential.

@methyme
Its well documented that grad starting salaries have remained pretty static for lots of graduates in the last 10 years. They may well increase in shortage skill areas of employment but there won’t be general rises all round.,If we go into recession it might not be possible for firms to recruit at all. That’s the big danger. Shrinking business equals no higher grad salaries. Most don’t get the higher starting salaries either.

Look at hospitality, retail and the civil service. Two are on their knees and one isn’t recruiting grads at all.

Its well documented that grad starting salaries have remained pretty static for lots of graduates in the last 10 years.

It's also well documented that inflation was low for the ladt 10 years but has now spiked. There is also record low unemployment and a key skills shortage. Recruiters who are able to pay more are doing so, and public sector workers are migrating to the private sector in droves. This will inevitably result in higher grad starting salaries in the short term. Yes, the money will run out when the recession kicks in, but that will also help to keep inflation down. I did caveat my point with "if inflation does continue at its current rate", which is (hopefully) unlikely.