Taking on £50,000 in student debt may sound onerous, but the headline figure doesn’t reflect what you’ll repay. We explain why student loans are usually the cheapest way to fund university or college. If you or your child will attend university soon, you may be considering how to pay for it.
With university costs restricted at £9,250 a year, many will require £27,740 for tuition alone. Maintenance loans vary greatly based on your financial situation and where you live while studying. Overall, borrowing above £50,000 is common, and some people need much more.
Many people are wary of borrowing such a large sum. However, most student loans are forgiven before they are repaid, making them more like a graduate tax. Student loans are different from other debts, and until you make a particular amount after graduation, you won’t pay anything back. That said, here’s the scoop.
How much does university cost?
How much you wind up borrowing will be affected by numerous variables, such as the entire length of your program, the costs associated with your chosen institution and program, and your family’s financial situation.
Based on their analysis, the students at Save The Student estimate that it will cost you something in the neighborhood of £57,000 to get your degree in three years.
Those totals are broken down as follows: annual tuition of £9,250 plus annual living expenses of £9,720. It’s possible that some folks will require more or less. For example, living students in London are significantly higher than in other global student hubs.
There are also options for students who wish to save university by living at home and commuting to college. However, some students may be lucky and discover that their university actually charges less than the maximum £92,50.
However, as a ballpark figure, £57,000 should be used.
How much student loan will I get?
The first portion is for school expenses. It is paid in full to the university in the form of tuition, up to a maximum of £9,250.
Second, there’s the sustaining loan, which is used for day-to-day expenses. Depending on whether you live at home or away and what type of school you attend, there are different limits in place.
The majority of students won’t get the whole award. Households with incomes over £25,000 are assumed to fund financially to their own maintenance.
This makes it difficult to put a precise figure on the total loan borrowed; however, most students will need a minimum of £27,750 to cover tuition and living expenses. The latter is subject to change, but a loan study conducted by Save the Student estimates an annual average of £5,640.
This means that over the course of three years, borrowers will need to secure an additional $13,000 in funding, typically through a combination of part-time work and/or parental contributions.
Naturally, some people, especially those with lesser earnings, may end up borrowing more more than they can afford.
Those are huge figures, but try not to freak out. Your loan’s manageable monthly payments ensure that you won’t go bankrupt trying to pay it back in full before the debt is forgiven.
How do repayments work?
In order to make sure that everyone can afford their student loans, the repayment system is set up in a particular specific way. Although these are very large numbers at first glance, most borrowers do not repay back nearly as much as they borrow.
Most people never pay back the whole amount they borrowed because student loans are forgiven after a predetermined length of time (typically 25 or 30 years after you start repaying, or once you reach age 65).
If your loan balance is more than a predetermined threshold (which will change depending on your payment plan), your monthly repayments will increase by nine percent. Plan 1 has a minimum annual salary threshold of £19,895 as of this writing. Most incoming students will be required to enroll in Plan 2, which has an income threshold of £27,295.
If you want to avoid making any repayments at all, your yearly salary must be more than £27,295. If you never reach that income level, you will never be able to repay the loan, and the principal and interest will be forgiven.
Should your income go below that threshold, you will cease making payments until such time as it rises over the threshold again.
If and when you reach the payment threshold, your rate drops to just 9%. Someone making £30,000 per year, for instance, would have a monthly premium of about £20. If you earn £50,000 a year, your monthly payment would be £170.28.
Paying back your student loans would only cost you $545 a month (out of a net income of over $5,500) even if you were making a whopping £100,000.
One’s repayment obligation rises in direct proportion to one’s income, and only the wealthiest individuals ever manage to settle their debts in full. A graduate starting at a salary of £30,000 who works their way up to a salary of £129,660 over 30 years is unlikely to ever pay off their loan or interest in full.
How much interest will I pay?
Interest rates can go as high as 4.1% in some plans. While this may seem expensive, keep in mind that the vast majority of borrowers never end up paying interest on their loans.
Those who have a high enough income to pay off their loans quickly or who borrowed significantly less than the full amount (maybe because they received a scholarship or other financial aid) should pay attention to interest.
If this is the case, you can reduce your interest costs by making repayments on your loan.
What happens if I can’t afford the repayments?
If your income drops, your repayments drop automatically, and if you dip below the threshold, you won’t pay anything at all. As long as you’re not self-employed, the student loan comes out of pre-tax earnings, so you don’t need to think about affordability.
If you ever get into severe debt, you can ring the Student Loans Company who may be able to pause your payments. Have your monthly outgoings and income to hand when you call to make things easier.
Will having student loan debt impact my credit score and finances?
Student loans may have the appearance of a debt, but financial institutions don’t treat them that way. It won’t affect your credit score if payments aren’t being made, and they won’t stay on your credit report either. The word “debt” itself is deceptive.
There may be a change in cost, but that’s about it. When considering whether or not to loan you money, lenders will look at your income and credit to income ratio.
Since you will have more disposable income after paying off your student loans, you may be able to reduce the amount of debt you take on each month.
Are there cheaper alternatives to going to university?
Don’t let the overall cost of higher loan discourage you from pursuing your dream of attending a university or college. Nonetheless, this doesn’t imply that you’re stuck with only one set of university choices that require a four-year degree. Some fields, such as law, medicine, and engineering, require an advanced degree, while others do not.
Consider the career path you’re interested in pursuing, and then check online to discover if formal education is necessary or if there are alternative ways to enter the sector. It’s possible that if you work your way up the corporate ladder, you can advance your career three years sooner.
Apprenticeships are an excellent method to get started and avoid accumulating student loan debt if you have no interest in continuing your education. You can find out what kinds of apprenticeships are available right now by using the government’s own search engine.
Still, university is often a wise financial choice. Graduate graduates are £130,000 better off than non-graduate graduates over a lifetime, when accounting for tax, student loan repayments, and foregone earnings, according to the Institute for Fiscal Studies. The sum is £100,000 for females.