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Student Loans - Why they should be debated
Navigating the complexities of student loans in the UK can be a daunting task for both prospective students and their parents, as the funding of tuition fees and maintenance loans can be met by either paying upfront or through student loans.
Which method do you think is most suitable?
On the one hand, student loans provide an essential access to higher education for those who might not have their own savings or the support from parents to afford it upfront.
The loans are designed to be repaid only when the graduate's income exceeds a certain threshold, ensuring repayments are manageable and proportionate to income. Currently for those on Plan 2, which is the most common plan for undergraduates in the UK, the yearly threshold is £27,295 of earned income and 9% above this threshold is deducted from pay as a student loan repayment ([accessed 26/03/2024: Repaying your student loan: When you start repaying - GOV.UK (www.gov.uk))].
On the other hand, the average student debt in the UK is a considerable burden, and the interest rates, while capped due to high inflation, add to the total amount that needs to be repaid over time. For those on Plan 2, the loan has a current interest rate of 7.7%. This relatively high interest rate could likely mean the owner of the debt (i.e. the student) will keep paying 9% of their income above the threshold for the remainder of their working life, and therefore have less resources available to meet short-term needs such as regular expenditure, medium-term needs such as house deposit, and long-term needs such as retirement income.
Let’s take a look at what a student loan growing at 7.7% a year looks like. This assumes tuition costs £9,000 a year for 3 years:
Student Loan Growth
| Years after University | Student Loan (growing at 7.7% a year) |
|---|---|
1 | £29,079 |
5 | £39,123.91 |
10 | £56,691.87 |
20 | £119,035.86 |
30 | £249,939.48 |
Notice how after 5 years the loan amount is higher than the amount of income most salaries provide?
A parent with the desire and capacity to consider their child’s personal circumstances, may wish to consider taking a different approach by using time and capital markets to their advantage.
Let’s say a child turns 8 and the parent notices they are 10 years away from university. The parent would prefer their child not to have a debt burden that would be paid out of future earnings, and so the parent decides they would like to have £27,000 available in today’s money to cover the child’s university tuition upfront. If that same parent were to start putting away £225 a month for the next 10 years into an investment plan – one that grows in line with inflation – they would meet their goal.
Hopefully this demonstrates the power investing can have on someone’s future. If this is something you have previously debated and would like some help, you can contact as via our website or message me directly.
TLDR: 9% of earnings above the repayment threshold can be a lot for someone, especially when relative to monthly expenses and pension contributions. Plus, with the debt of student loans compounding at a relatively high rate. it's crucial for prospective students and their parents to understand the long-term implications post-graduation.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
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