Plan 2 Student Loans- much higher interest, Times article - parents pay off

[fluffythecat1]

Our son is potentially heading to university in a few years. I follow Martin Lewis for his excellent financial guidance and have been concerned about his advice on student loans. Before, it was advisable to get a loan and in likelihood not pay off the full amount under the old system, now it seems the interest on them has changed as discussed in this Times article from yesterday, meaning that even with a good job, there is a significant long-term burden for graduates.
What are people’s thought? Gap year to earn some money before going? Put any money in a child trust fund towards it? Reducing the amount of loan taken looks key.

I had £21k student debt — why did my twin owe £40,000 more?

https://www.thetimes.com/article/8598d6cf-cb9e-4e78-9a51-7b1023ce53a6?shareToken=e66982418968f371f402de3a5c210f99

I think one thing that has changed in even the last 5 years, and certainly the last 10 years is the expectation of salary compared to cost of living.

I would say 10 years ago there would definitely have been an argument that, if you had the money up front, it was better to start with no loans and the (hopeful) graduate salary would enable you to buy a house and have a decent standard of living.

Now, it's much harder for young people starting out. They might well prefer to have a lump sum in their twenties to get them set up in (e.g.) a house rather than save (e.g.) £1500 a year. Even those in decent careers are struggling. Taken over the long term, no, a student loan does not look like a good prospect, but it's not so simple if you consider the ebb and flow of a lifetime and the points at which money is more important.

I don't think the student loan is great. I think we will see the shift over the next few years away from the traditional university model as many students are priced out of it. But at the moment, unless you have super wealthy families, it does open opportunities for many.

It depends where you go to university.
The tuition fee loan is currently £9535pa (going up next year) at most universities.
The maximum maintenance loan (outside of London) is £10,544pa (again going up next year).

This doesn't provide enough for a student to live on in lots of places, so will need to be topped up either by parents or student. I'd say Google's 20-30K a year is probably accurate (£30K would be London expensive end).

It's generally cheaper to live in the family home and commute, which is increasing in popularity. Or to choose a distance learning option (again, growing in popularity).

OP I think you need to do far more research before posting. Plan 2 vs plan 5 etc. Otherwise you’ll just confuse people.

@SleepQuest33 That’s probably because you see it as debt. It’s not, because you don’t pay it off! It’s a charge on your salary. There’s still
going to be 25% who don’t pay it off! So how can it be a debt? Many dc don’t have £20,000 a year available! So if you do, great, but most don’t.

The best advice is to be discerning about course and university and ensure dc do everything they can to be employable. If a course doesn’t produce high numbers of employable grads, think again.

DS is a teacher with a plan 2 loans. Four years of fees and maintenance he graduated in 2018 with about £60k+ outstanding. This could potentially have been paid off but the interest is just staggering.

@MyBestThing So why not pay it off then? He will get promotion and then it’s just a monthly sum. Don’t even look at the interest. It is the lower paid grads who will pay more though because of the new 40 year plan.

It is a Graduate tax.

Repayments are linked to earnings, not amount borrowed.

Once you accept it as a graduate tax (that the very rich avoid)
its much less stressful

5 year degree and £80,000 debt. Not even touching the interest despite repaying over £200 a month. Loan now almost £100,000. Will estimate repaying £250,000 over 30 years (will not ever pay it off as interest gets higher if you earn more). It's a con. Interest is 7%+ even though base rate was less than 1% when loan was taken out. Why do it ? Because she couldn't be one a doctor without a loan.

As for the "you will repay much more than you borrow"
Well yes,
if you take out a repayment Mortgage for £300,000 over 25 years
you will pay 35% extra because of the interest
and those payments do not stop if your income drops

@mumsneedwine Other careers were available and £200 a month reflects a decent salary. She’s got plenty left! Look at the future. She’s paying up for earnings way higher than most.

Mmm. That's if she has a job. Not sure if you've noticed but doctors are unemployed these days. Rich kids pay nothing. Poor ones pay 9% interest for 30 years. If it was base rate or the rate of a normal loan people would not be so cross. What is the justification for such a high interest rate, and what other loan increases the interest rate as you earn more ?

And yes, the 60 hour week she works, and green at night, does pay her a half decent salary. On which she pays an effective tax rate of 55%.

I agree. He encouraged young people to think they would never have to pay back their loans, which was obviously unsustainable. The Government need to ensure sufficient repayments are made to cover the costs of the scheme and give taxpayers value for money.

But the scheme was not designed that way.

No student has a legal or moral responsibility to clear their loan

The unpublished papers always knew that 50-60% of loans would be written off

Plan 5 so much better than plan 2 imo. The reason so many more students are expected to pay off their plan 5 loans is because they have much less interest added, the move from 30 to 40 years seems much less significant unless earnings are pretty low over that time period.

Which unpublished papers?

So 9% of your income for up to 40 years if you never earn more than 25k, still paying well over what was borrowed - does anyone really think this is a great deal for 18 year olds?

There are other options as a previous poster said, working for a year even on min wage would pay for two years of fees, living at home and working part-time during term and full time during the holidays would cover the third years fees - surely that's better than signing up to a life time paying an extra 9% tax. I also can't believe that Martin Lewis banged on about it being a great deal for so long.

Does it still get cancelled if you move abroad for a certain period? Few uni pals of mine did this.

@TheCurious0range No. Or many doctors would get free training. They still pay. As they should.

@AmplePlayer if you don’t earn £25,000, you pay £0. It’s a free degree. It’s not far off free if you earn £30,000 but the uk public has paid and the person hasn’t got much out of the degree and nor have we.

Of course thst was a good deal for the student as it was 25 years and most degree holders earned more than non degree holders. The bad deal was for the country as less than 50% paid back the loan. The latest loan scheme should get 75% paying it back but I have my doubts. Martin Lewis has consistently explained it was a tax (in effect) and most didn’t pay it back - correct.

What other system is there? 37.% of 18/19 year olds go to university. We could look at finances very differently if we cut it to 20%. Or less - when the state wrote off all fees and costs. What about 10%? That’s much cheaper. Maybe that would be better? Or parents could be forced to save? Or we carry on as we are with students owing £250 billion to us. If we want vast numbers of universities, dc having a better then 1:3 chance of going and an economy built on degrees in many ways, we have to pay for it. At the moment the state pays first. In the USA it doesn’t. Maybe that’s better? Or we have loans and everyone can go and everyone makes some attempt to pay it back. Other option - don’t go (or have rich parents).

It's not paying back the loan that's the issue, it's the amount of interest added.

We could perfectly well decide to fund all or a majority part of this through taxation -- as was the case up until 2010 (and there’s a good argument for this being cheaper for the taxpayer than the full fee system). It was always a political choice not to do so; and the coalition/Tory-led 2010 government designed the full fee system with the eventual idea that the student loan book would be sold off to private providers to generate lucrative interest payments. In the end, no private providers actually thought it was a good deal!

As for the numbers of students going to university - during the postwar period even if the percentage going to “university” then appeared to be a lower figure, in reality it was not that much different to the present day. Remember that the old polytechnics and technical colleges converted to universities in 1992 (more then half of our current university institutions). Before then, a smaller percentage went to the old “universities”; but a much bigger percentage to the polytechnics, technical colleges, and a lot to the old further education colleges, teacher training colleges, nursing colleges, and so on, all also with no fees and with grants. Many jobs which required diplomas or training certificates then have now become degree courses (with good justification in most of these areas). The actual percentage of the cohort who went to tertiary education and training in the boomer era was not actually very far off the current levels; it’s just that most of that was not then provided at “university” and now it is.

"if you don’t earn £25,000, you pay £0. It’s a free degree"

A full time job at minimum wage will now pay £25k. This is what has changed since the peak of Martin L's "selling" of the good deal - wages have risen, and the pay-back threshold has not.

From my perspective, this was always a ticking time bomb. Martin L's motivation was to encourage students from all backgrounds to not reject going to university because of the perception of high fees. He effectively facilitated meeting (and exceeding) the Tony Blair Government's target of 50% going to uni. But in the meantime, people have realised that sending more young people to uni does not automatically result in more young people getting graduate wages - it just results in more educated people in minimum wage jobs. It's not a sustainable policy. Hence the shift of Government focus towards good quality apprenticeships and level 4/5 technical qualifications instead - the sort of qualifications that used to be offered by technical colleges and polytechnics.

The idea is that the debt increases in line with inflation so in real terms they are actually paying back what they borrowed - this is for plan 5 loans. The simple total amount isn’t relevant, it’s the real value of those repayments. Plan 2 loans are totally different because there is a premium of up to 3% on top of the inflation linked interest rate. They are very different animals.

What the recent blow up on these loans has shown, without doubt, is that psychologically people don’t like having a large “debt” next to their name. Even though it is different from any other sort of loan you take out as it is linked to ability to pay and gets written off after 30/40 years. These recent articles show that people don’t think like that.

The new Plan 5 loans are more likely to be repaid in full, but that depends on lots of assumptions. If you don’t like having a large “debt” linked to your name then you need to borrow less, either by not going to uni or by taking out smaller loans by taking a gap year, living at home (which is what non-university people have to do until they can afford otherwise out of their wages), or have a part time job.

The govt (to the extent that it is addressing the problem at all) is focussing on the poorest students - those taking out full loans with very low household income - and many universities offer additional bursaries to these students too. I don’t see much help coming for other families.

I’m always amazed on the many threads here of how much money many students (at least mumsnet offspring) spend on top of accommodation costs. It’s not unusual for parents to say they pay for accommodation and their child takes the min maintenance loan to spend.This can be as much as £150/week during term time. In my opinion this is an absurd amount of money - do they realise that they’re going to be paying back all this spending money with interest on interest on interest etc etc in 40 years time when they’re own children are going to uni?

The Daily Mail might have popularised the “50% Tony Blair” myth, but the 50% target was actually a Major government pledge that New Labour kept on, and it was 50% having some experience of tertiary education (which could include workplace training, higher level NVQs, etc.) Of post-1980s cohorts 40 percent or more reached this, so 50% was not a particularly drastic target, and it was originally part of the 1992 Major government’s “international competitiveness” strategy (given that global statistics showed many East Asian “tiger economies” already had tertiary education cohort percentages well exceeding this in the 90s). It was only when it became a continued New Labour pledge that the right wing press got exercised about it.

If you fell for the anti-New Labour era schtick about this, you were had. 50% with experience of tertiary education is not actually an unreasonable target for an advanced economy in 2025 - one might say that it’s pretty modest given that in the high tech economies it’s often much higher - and often funded very aggressively by the state by governments who see themselves as competitive in tech, high tech manufacturing and knowledge sectors.