Student loans: What’s changing and how will it affect students?


Student loans What’s changing and how will it affect studentsTwo big tuition fee changes have been announced. But what do they mean for students?

Changes to tuition fees will affect young adults in your family; whether yourself, children or grandchildren.

Opening the 2017 Conservative Conference, Prime Minister Theresa May announced plans to freeze tuition fees at the current limit of £9,250 per year. In perhaps bigger news, she also pledged that the minimum annual income needed to begin repaying student loans would rise to £25,000 per year, an increase of £4,000 on the current threshold of £21,000.

The tuition fee freeze will be in place until 2019 and further details will be laid out during the Budget announcements on 22 November. There is also speculation that the government are looking to reduce the interest rates incurred on student loan repayments, as well as designing a plan which will see course rates differ depending on the course type.

Student Loan Overview

Student loans are currently available for domestic students who have been accepted onto a three- to five-year course at a recognised higher education institute. They consist of two parts:

  • Tuition fee loan: This covers the cost of the course and is paid directly to the university
  • Maintenance loan: This is to help with the cost of living whilst studying and is allocated on a means-based process, with the amount depending on the student’s living arrangements, geographic location and parent’s income

Maintenance grants are also available for students from a low-income background, but, as grants, they do not need to be repaid and as such, will not affect personal finance and planning in later life.

Student loan repayments are subject to interest – this differs depending on the loan plan and the year it began. A table of interest rates and repayment income thresholds can be found here.

Currently, those on both Plan 1 and 2 repay 9% of their income above the income threshold for their plan. The thresholds are current set at:

  • Plan 1 – £17,775
  • Plan 2 – £21,000

The proposed changes will affect those on Plan 2, who will begin to repay their loan only when they reach an annual income of £25,000. This gives graduates an extra £360 per year.

Effect on personal finance

For most people, taking out a student loan is a necessary part of the university experience. Unless your parents are willing to pay the tuition fees, or you have savings and income of your own to cover it. Student leave university with three things:

  • Great memories
  • A degree to be proud of
  • And a sizeable amount of debt.

The average student graduates with over £50,000 to repay, according to the Institute for Fiscal Studies, so it is worth considering as part of a long-term financial plan.

You begin to repay your student loan when your annual income rises above the threshold. For those on Plan 2, who started their undergraduate degree after 2012, this is £21,000 until the new changes become effective. The repayments are taken out of your monthly income before you see it and often, this creates an ‘out of sight, out of mind’ attitude toward them.

Student loan plans also have a designated cancellation date, which will vary depending on the loan type. For those who started their degree after September 2012, this is 30 years from the first repayment date (The April after you begin to earn more than the threshold). This can lead to many students worrying less about their repayments, as it will eventually ‘go away’.

Research from the IFS shows that the reforms will affect students in the following ways:

  • Reduce the average lifetime student loan repayments by £10,000
  • Save graduates who earn more than £26,500 a total of £500 per year in student loan repayments
  • Reduce the average forecasted debt for graduates from £50,000 to £49,800

These factors may tempt you to forget about your student loan and ignore the mounting interest until it is written off. But, there are more productive ways to get rid of the debt and avoid paying the interest accrual that comes with time.

There is no penalty for making overpayments or paying off your student loan early, so if you can afford to, or if you can work it into your budget to chip away at that debt, you should. The earlier your loan is repaid; the less interest will have been added to the amount and the smaller your overall repayment will be.

Paying off your student loan debt frees up more income for you and your family to enjoy – either for everyday living, or to put away for a more comfortable lifestyle in later years.

To discuss your options and find out more about student loans and how they can affect your personal finances, get in touch on 0115 933 8433.