New student loan rules: 7% vs 12%

I REMEMBER visiting London for a trip in secondary school and it felt like the air was full of magic. There was something about the city’s energy that pulled me in and at 19 I decided to move there for university.

The capital certainly came with unparalleled opportunities but there was a slight downside – it all came at a very large cost, especially the university education price tag.

How much is student debt?

The average student debt among the class of 2020 stands at £ 45,0001. This includes tuition fees – which comes in at £ 9,250 per year and living costs.

In 2021/2022, students are entitled to up to £ 7,987 if they’re living with parents, up to £ 9,488 if they’re studying outside of London and not living with parents and up to £ 12,382 if they’re studying in London. and not living with parents2.

Faced with London’s high living costs and a student loan, the best options to fund my move were a part-time job and some help from the bank of mum and dad.

Students who take a loan for their tuition and living costs start to pay it back once they earn more than £ 27,295 per year and the more a graduate earns, the higher their monthly repayments. After 30 years, the balance is wiped out which is why many view a student loan as more of a graduate tax, than a loan. But as their loan is charged interest – in line with inflation as measured by the retail price index (RPI) – their outstanding balance will increase over the years.

After graduation, the interest added to their balance is dependent on their earnings. Those who earn under £ 27,295 will be charged the RPI rate, while those earning over £ 49,130 ​​per year will be charged RPI plus 3%3.

Thanks to inflation, the Department for Education proposed a 12% hike in April this year but after pressure from ministers and campaigners, interest on student loans will be capped at 7.3% from September 2022.

While the cap will bring about some relief, 7.3% is still significantly higher than previous years and when wage growth stands at 6.6%, this figure is concerning. In 2019, the headline student loan interest rate was 5.4% and in 2020, this increased to 5.6%4.

That’s an eye-watering amount of interest. So, is it worth paying my student loan off? Well, I’m in no rush to clear the balance but as I now earn over the threshold, a small portion is automatically removed from my pay check.

For graduates earning below the threshold, making a voluntary contribution may not be a top priority, particularly when factoring in the rising cost of living and high inflation. The price for food and non-alcoholic drinks increased by 8.7% in annual terms last month, the highest increase since March 20095. And property prices have also skyrocketed, with the average price of a house hitting £ 281,000 in April6 – not great for new graduates.

In the future, tuition fees, maintenance fees and student loan interest rates could rise so preparation for parents is key as it can help children shoulder the financial blow and ensure intergenerational fairness. Investing in a Junior ISA could help children or grandchildren with university expenses and even assist them to graduate debt-free.

Having the financial means to enjoy university is certainly a privilege and I’m happy that I pushed myself to make the big move as it came with some very valuable life lessons – namely financial responsibility.

1Student loan statistics – House of Commons Library (parliament.uk)
2Maintenance loans, maintenance & support grants – Student living costs (ucas.com)
3Martin Lewis – 4.5% interest on post-2012 student loans: should you pay them off? – MSE (moneysavingexpert.com)
4Martin Lewis – 4.5% interest on post-2012 student loans: should you pay them off? – MSE (moneysavingexpert.com)
5Food prices push UK inflation to 40-year high of 9.1 percent (msn.com)
6 Average UK house price jumps by £ 31,000 in a year (yahoo.com)

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