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When is loan not a real debt?

February 10, 2015 1:01 PM

Student loan repayment finance tableQuestion: When is loan not a real debt? Answer: When it is a Student Loan. I am asked a lot of questions over tuition fees, which is not surprising given the increase in tuition fees to £9,000. However, the Act that introduced the higher fees also significantly changed the repayment scheme. It was an Act of Parliament with a horrible half and a good half. It is the good repayment half that actually determines what students pay.

Students don't pay any fees upfront they are paid directly to the University by the student loan company. Post graduation students pay to the loan company 9% of their income above a threshold of £21,000, regardless of their student debt level. Therefore, what students actually pay depends on their income not the size of the debt, unlike a conventional bank loan. This means that, as the threshold is higher than under the scheme introduced by Labour, students actually pay less each month than under old scheme with lower fees, even when earning £50,000 per year.

There are other important differences too, such as:-

  • Student debt does not appear on credit rating agencies reports for mortgage or credit card applications, so will not directly affect the applications.

  • If after graduation income drops below the threshold then payments are zero again, which is good if a career break is taken to raise a family or when in part-time work.

  • If after 30 years the payments have not paid the debt back, the debt is written off.

  • Unlike normal debt in the unfortunate case of death it is written off, so Student debt is not passed on to the person's estate to pay.

  • The interest charges on the loan increase as income increases, so higher earners will pay more back than lower earners.

  • It's repaid through the income tax system

  • Bigger borrowing doesn't increase repayments

The result of these changes to the repayment scheme plus the introduction of a National Scholarship programme and higher maintenance grants, for people whose parents earn less than about £42,000, mean that more young people than ever before are applying to university, including ones from disadvantaged backgrounds.

In reality this is not loan repayment scheme but a graduate tax, where foreign students or people who move abroad after university cannot avoid repaying the cost of their tuition.

If you think this is just political spin from a politician and not helpful advice from an engineer, whose two sons are planning to start at University in the Autumn, then check out Martin Lewis's moneysavingexpert.com/students/ website.