MyBnk youth ambassador Gabriella breaks down all the changes and things to be aware of in terms of uni finance
With exam results out the way, thoughts for some young people may have turned to university.
For those starting university from 2023 onwards, the student finance system we have come to know is having a bit of a shake-up. On paper, the changes seem minor, but they will have a financial impact and increase the cost of going to university.
Whether you’re starting university this autumn or considering applying for next year, here are some of the changes to be aware of:
If you’re starting your course on or after 1st August 2023 you will be on plan 5. This changes some of the conditions of the loan:
- Interest: Previous plans had interest at the RPI plus up to 3%. This new plan limits this to interest as the rate of inflation only. This does mean the amount you owe will increase in time, but in line with the increase in the cost of living.As before, this interest will affect how long you’re paying the loan back for, not how much you are paying. The amount you pay will be determined by the amount you earn weekly.
- Threshold: The threshold before you start paying back your student loan has decreased from £524 a week to £480 a week, or £25,000 a year. Ultimately that means that those using the new loan system will start paying back their loan sooner. Since many graduates do not pay back their full loan plus interest before the debt is wiped, this means those on the new plan will often pay back more than those on previous loan plans.
- Debt Wiped: The amount of time to pay back your loan back before it is wiped has increased on the latest plan. Your debt will now be wiped 40 years after graduation, as opposed to 30 years.
Although interest rates have lowered on the new plan, overall, they mean that students taking loans from August 2023 onwards will often be paying back more than those on previous plans.
So, is it worth going to university? Here are some other points to consider on the financial side of things:
You do not need to pay for university upfront: Many panic about the cost of university and balk at the UK tuition fees of £9250. However, you may never pay the full amount back. The Student Loan Company will lend you the tuition fees and a maintenance loan which is means-tested on household income. You will then pay this back over the course of your working life, provided you earn above the threshold.
Watch out for the hidden parental/guardian contribution: Although you do not need to pay for your tuition fees upfront, there is an implied parental contribution to your university education. Remember the maintenance loan that is dictated by household income? The full loan for those in England studying away from home (not in London) is £9,978. If you are set to receive anything less than this, the government in effect expects your parents/guardians to contribute the difference. Even the Student Loan Company admits that “parents may have to contribute towards your living costs”.
Don’t treat student loans like a normal loan: After the typical three years at university, you will owe around £60,000. However, student loans do not function like any other debt product:
- It’s more like an extra tax: With a student loan, you repay 9% of everything you earn above the threshold (£480 a week, or £25,000 annually). Therefore, if you earnt £26,000 (£1000 above the threshold) your annual repayments would be £90. This rate of repayment doesn’t change, regardless of how much you owe. Therefore, you could see it as a 9% extra tax every year. If you earn very little, you will not be charged repayments – the system is designed to charge the highest earners the most.
- The debt wipes after 40 years: 40 years after graduation, your student loan will be wiped regardless of how much you have repaid. Estimates suggest 55% of graduates will not repay everything so don’t worry if you cannot clear the ‘debt’.
- The interest rate is competitive: Student loan interest is set at the rate of inflation. This interest is designed to keep it at a lower and more competitive rate then other borrowing options.
- Student loans do not go on your credit file: Having a student loan won’t limit your ability to get credit in the future as it will not appear on your credit file. The only impact it could have is reducing your disposable income for mortgage affordability scoring.
For more information about uni finance, visit our the student page of MyBnk’s website.