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

@startingup It might be news to you, but many grads do earn the minimum wage! They have a job and a degree but they aren’t on any great career trajectory.

It was also the conservatives who increased university provision with the post 92 universities. This greatly increased degree participants. Around 50% of out workforce is educated to degree standard but we send around 37% of school leavers to university. It’s never been 50%

Martin Lewis deals in facts about the loan - that it’s a tax. Many people are risk averse and surely we want the best dc to get degrees? They should also go to the best university they can and try and rise above the minimum wage. Some dc are inevitably going to university who are not suited but blaming Martin Lewis is ludicrous. I’d blame schools and over supply of university places not finance advice!

The rich don’t avoid it, they can simply afford to pay it upfront.

If you can afford to buy a £500k house for cash, you avoid paying interest on the likely 30 year mortgage, but you don’t get the house for free! If you have a car lease, you pay more than if you can afford to buy the car.

Also who is “rich”? If you pay £1.5k every year into your child’s ISA, they would have enough when they reach 18 to pay their own tuition fees. Now £1.5k a year is a lot of money to some people, but there are plenty of people who cld afford to do this - it’s £30 per week so the cost of a manicure or a daily coffee - but they haven’t done so and get a nasty shock when their child wants to go to uni.

It is always cheaper to buy things upfront than borrow to pay for them.

And from a cash flow perspective the govt is actually very happy that some people pay for themselves as this is cash that flows into the Treasury that they don’t have to fund in the international capital markets.

@Notanorthener I think @Talkinpeace meant monthly repayments. Not the fees. Their dc do avoid monthly payments but so what?

Your DDs university fees would have been £3000 a year in 2010 and I suspect rental and living costs were more easily cover upfront by professional parents out of their salaries. Why was your DD more deserving of a university education and an easy to pay off debt than a young person born a decade later?

@bookmarket Because lots more go to university now! The numbers have changed after courses were not capped in terms of numbers. The government (all of them) realised they could not afford to pay for expansion. Most of our workforce has the lower fees. DD2 didn’t. It’s life. A bit like house prices - some get to buy years earlier at a reasonable price and others don’t. If we want 37% gojng to university, someone pays. As DD1 pays stonking tax, she’s paying her dues. Are you jealous of the majority of grads then? Sounds like you are. Remember some didn’t pay 1p.

Not at all. Why would I be jealous of other graduates?

You were claiming your DD was able to pay off her student debt quickly because she is a high earner. But she didn't have the same fees, loan or debt so it's not really relevant to talking about the plan 2 loan.

@bookmarket It’s historically what students could do and some use inheritance and earnings now. Plus parents as the article says. Some do pay them off, even now. However a quick decision needs to be made.

It has never been ‘cancelled’ if you move abroad. You are expected to keep the SLC informed, sending them copies of your contract and income, and then continue with repayments according to the repayment threshold in that currency.

I really like ML, but I just can’t agree with his thinking on student loans. I think they’re a disgrace.

@VillaOfReducedCircumstances Why do you think he’s wrong? Is it that he explains the “tax” is based on earnings and not size of loan? What’s the issue?

@OhDear111, I think it’s the Just think of it like a tax line, but in reality, that has to be added to all of the other demands on your salary.

My younger colleague is in a highly specialised role, and has a reasonable salary, but she’s really struggling because of her student loan repayments. But then there will be other people perhaps who never pay anything back. It just feels like students really have the odds stacked against them now.

People don't realise what has happened and are blinding wandering into a lifetime of debt and servicing that debt which will control so many aspects of life.

Exactly @upstairsdownstairscardboardbox- I was able to pay off my student loans relatively easily, but I just don’t think that’s true for most students now.

This is my thinking. People see the large sum that might be the total repaid after 30 years but fail to inflation adjust it and look at it in real terms in today's money.

I'm investing the money for DCs in global trackers in ISAs and they will have a very healthy sum in 30 or 40 years.

If we did pay off their loans I would expect them to invest the money that would have gone on loan repayments but it wouldn't grow to the same extent as investing a lump sum now and leaving it for 30-40 years. And whether they would keep investing for 30 years instead of spending the extra net income is doubtful.

It’s not just the loss of income in paying back the loan over 30 years , it’s the loss of financial opportunity that the payment could be used for instead. £100 per month over 30 years in an S&S isa would be a reasonable pension.
but the talk over the last 10-15 years has been how to maximise your loan rather than take the minimum so maybe that outlook will change

Please could you explain who pays 9% interest? Is this an older loan plan?

And how does the interest rate increase the more you earn? I thought it was the same for everyone.

(DS will be starting uni later this year so this is all new to me!)

@seveneight
The interest rate on each loan is fixed according to the scheme you are in.
Some are higher, some are lower.

The REPAYMENT rate is 9% of all earnings above the limit
which also varies between schemes

Scheme details are here
https://www.gov.uk/repaying-your-student-loan/what-you-pay

All new students are in Scheme 5

Thanks - that was my understanding. I was just a bit confused by the mention of 9% interest rates, and variable interest rates depending on earnings.

@seveneight it's more for other plans. But the more you earn the more interest you pay

Yes, I’m very conservative when it comes to personal finance. It may be a small amount per month, however that small amount could be a pension contribution or going into savings. It seems it’s best to keep loans to a minimum where possible, since that money could be going towards a house deposit or similar.

How it's calculated. Plan 1 was fairer. It's getting worse every time

Thanks for clarifying - I didn't know about the stepped rate. I think that only applies to Plan 2 though so I don't think it's the case for newer loan plans if I'm understanding correctly.

Was 9% interest just a typo in your previous post?

RPI was 4.2% in December.

@seveneight had been 9% as RPI was higher. But it's 9% of income over £25,000 for plan 5 I think so higher repayment than plan 2 as in more income.

But highlights the con of plan 2 as plan 5 is just RPI, not added 3% or sliding scale if earn more. The plan 2 students have been shafted.