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

You do know they are different countries with different laws and systems

@Notanorthener jisa didn't exist when mine were young. And we didn't have £2,000 a year spare.

@Notanorthener I’m always amazed at the lack of saving. Loans have been in for decades. They have been well publicised and so are the fees and costs. Parents might not have had the current savings vehicles available but there have been excellent policies for dc such as longer term funds for dc which were tax free. Some savings for education are better than no savings but I understand some parents cannot do this.

I honestly think it wasn't on parents' radar because of all the pro-loan publicity. The £9000 fees and plan 2 loan only came in for 2012. Current graduates with this style loan will have been aged 9 up to 18 when they were introduced. Hardly leaving much chance for parents to save and invest. Also, parents who have been saving have invested money for house deposits because the out of control housing market has been on parents' radar far longer than the cost of a loan.

Until 2021 when interest rates rocketed - taking the loan was still marketing and promoted as a positive thing to do. "The cheapest loan you will ever get" - "you won't even notice the amount going out of your bank"

Hindsight is wonderful. We could look at the pension triple lock (costs the same as it would to fund higher education) and say the current pensioners had every chance possible to have saved and invested in private/work pensions but they didn't.

I think the thing that's shockingly unfair with plan 2 is that if you are a higher earner you get charged a higher rate of interest.

No bank or other financial lender would have any legal grounds to do this.

Much as I admire Martin Lewis's efforts to educate the general public on finance/insurance matters in general, I've never been comfortable with his re-branding of student loan repayments (which for so many graduates are almost 100% interest charges) as a "graduate tax".
I also find Rachel Reeves statement about being fair that those without a degree should not be subsidising those who go to University, utterly disingenuous.

She's conveniently ignoring the benefit of higher earners contributing to the public finances through higher amounts/rates of tax and NI.
A nation's graduate higher earners will be subsidising the lower paid through contributing much more to the public purse giving the government more funds for the NHS, Education, Welfare benefits and all other public services. Some very high earners may well be paying for private schooling for their children and private healthcare for their families too, another saving for the government.

It’s not just hindsight though. It’s always been a good idea to save for your child’s future - to the extent you can. The govt introduced Child Trust Funds in 2005 to try to encourage this culture of saving - whether for education or a house deposit.

But yes, a lot of people thought they wouldn’t be paying back, or the amount would be trivial. It turns out that 10 years into your career with a salary of £50k, paying £200 a month is a meaningful hit.

Ironically though - for parents to be able to save enough to avoid the needs for their children to take out student loans, they would be looking at (at least) £200 a month (and for today's 18 year olds with historical low interest rates, that would not be enough). And that's per child.

We can't simultaneously say that parents should be saving £200 a month so that their child doesn't have to take out loans, and that £200 a month is a hit to pay off on your salary.

But that’s exactly the point: you either have to save in advance or pay with interest afterwards. And it’s always cheaper to pay from savings rather than borrow. Put another way: if you couldn’t afford to save from your own earnings, then why did you think your child would be able to pay off the loan from their earnings?

(I’m not the one complaining about paying off the loan @£200/mth, by the way, but others are.)

I would love to know where people think the money will come from to pay off these loans if the students themselves aren’t paying or if the interest rate is cut. I would love there to be no loans or zero interest but who is going to pay? The only other person is the taxpayer and as we have a progressive tax system that means higher earners which means graduates and especially higher earning graduates - which means those earning £50k+. So all that happens is you take from Peter to pay Peter (not even Paul!).

@Notanorthener You surely know where the money comes from?!! Uk borrowing! We live beyond our means and that’s why they want more money back. If they reduced the numbers going to university it would reduce what is owed and would be more manageable. Halls of residence could be converted to housing. We are set to have £250 billion owed before long and the uk taxpayers pay higher tax to service this. So younger people lose out all round.

£200 18 years ago is worth more than £200 in 10 years time ...

Parents with young children (which is when they would be wanting to get most into savings due to compound interest) are arguably at their least affluent in terms of disposable income. Their costs (particularly childcare) increase; often one or both of them becomes a SAHP or works part time.

Young people without children and lower cost of living who are able to devote themselves to their careers in their twenties and early thirties are generally quite well off in terms of income.

I certainly had more disposable income pre-children than I've had at any point in my life since - and am not likely to surpass it until my youngest finishes university (yes, she has taken out loans).

@redskydelightIts very possible for peoples careers to take off in their 40s though and after child care ends, then is the time to save for dc when they are older. People used to save to buy dc a car. Now it’s uni costs or both. However it’s sticking your head in the sand to do nothing.

I think, as others have said, that Martin Lewis has had quite a big influence. My understanding based on his advice was that it was silly to not get a full loan because so few students paid them off.

The JISA evolved to replace the Child Trust Fund. CTFs were opened by the Government for all children in the current uni cohort, including my eldest (born 2004) and youngest (born 2006). Unfortunately, back then, I knew nothing about the power of investing in tracker funds, and none of us knew that uni funding would become such a big issue. A too-large proportion of the money I did put into the funds was eaten by fees (again, partly due to my ignorance of investing).

My youngest was born in 2002. Before a time have any help for anything. And I'm a teacher and we were not rich.

But has that changed??

For the people on Plan 2 has the amount they will pay changed??

Will they pay it earlier? Are they gonna pay more of it off than what they understood when they took out the loan?

Plan 5 is different and the advice would be different. But what has changed for the Plan 2 people?

But if you only start saving when childcare ends, that only gives you 7 years of saving. That's a huge amount of saving to get to 3 years of uni costs. Not remotely in the same ball park as a car.

@redskydelight Depends on the car! I was really assuming high child care costs up to age 4. Much less after that for many. Then parents have 13 years, certainly 10. That’s a fairly good time for some saving. However any loan requires repayments based on salary. For many, I agree, it’s not possible but they can at least try and save to top up minimum loan.

The big issue is, we cannot afford free HE education and haven’t been able to for 40 plus years. We have tripled the numbers going to university and then wonder why we have a problem. It’s inevitable those earning more from their study pay.

What we need is far less reliance on degrees and more on post 18 qualifications below degree level. We need to review the scope of the universities and what we expect from them. I would really like a split as Germany has but with the former colleges of HE once again offering HE below degree level but would be a valuable stepping stone to a degree elsewhere. This would help students stay local and top up with a 2 year degree at a university. It would help with student finance!

But is it fair to hike that on graduates? who as they earn more are also propping up everyone else by paying more tax as well?

Interest rates on loans go up as you earn more... its almost as it they don't want you to ever pay it off..... scam!

An FE college course also requires loans... the only way to avoid is an apprenticeship but good ones are hard to find and as our in the trade said to me the other day "Why take on a 16yo, train him up and then when he is 24, he leaves and sets up his own business in competition with me?"

@Alexandra2001 It’s not a scam! It’s how we partially pay for HE. What other way is there? Up to 18, dc don’t pay at college. Afterwards yes, but they get qualifications and many dc work and employer pays.

Every employer can see trainees leave! My DH’s company trained many engineers to professional status. They are not all there 10-30 years on. It’s how business works and always has. He’s ridiculous if he thinks all 24 year olds, after 8 years of service, are as good as him or have the money to set up. Frankly, that’s a ludicrous reason for not training. Does he steal trainees off other firms then?

I don’t agree with changing the terms of the loans (DD2 is affected) but people voted for this shambles who think people who earn money should be forced to give it to the government in ever increasing amounts. Its not what should happen. However if we want a huge HE system, we have to work out who is paying for it, or we don’t have it. It’s fairer that higher earners pay who have benefitted.

I know apprenticeships are hard to get and English or Politics students won’t want them. It’s making a career choice at 18 and that’s too early for some. Dc need to know exactly what they want and many don’t. Therefore paying is the only option. Why should others without a degree pay for the degrees they don’t have, and in many cases, get little benefit from?

I took out a student loan years ago and never paid it back as I have been a SAHM mostly. Didn't know that at the time, what my future would be. They'll just need to write it off.

This FT opinion piece from January made the interesting point that many of the younger generation of MPs have Plan 2 loans.

@user1476613140 They will but the country cannot. It was money that was spent on HE. It’s a debt. It’s a massive debt! Soon to be £250 billion. Well done you for taking Martin Lewis’s advice though. You got a very cheap degree. Did the country benefit from the money it spent on you?

Its the highest ever tax burden on working people, benefits are getting pulled - what happens if you need to rely on the state? Should we say @user1476613140v isn't entitled to benefits because she has no intention of paying back her student loans.

I found this free calculator useful
www.studentloanrepaymentcalc.co.uk/ but also it's shocking how quickly the interest builds up when the RPI (inflation) is greater than the annual wage increase.

What exactly is Martin Lewis' advice?

Yes I did a vocational degree and worked in the NHS before having a large family so I did use my qualification (not very long!).