The big debate for many parents with students attending university is whether student loans are paid off during or after their time at university. But what if never paying off the loan made more sense?
Reports from the Financial Times indicate that 70% of students who left university in 2016 aren’t expected to finish repaying their loans before the 30-year cut off when any outstanding balance is wiped out.
So, we have done some calculations to see if this is true and the results are astonishing. Assuming a 3-year course with £9250 frozen until 2019 along with a yearly maintenance loan of £8200 (the maximum available in 2018) the total amount outstanding on graduation was calculated to be £63,728.00. The table below shows a student’s starting salary (with the assumption that the salary escalates at 2% per annum), what they might be expected to pay back at today’s prices and the outstanding balance written off after 25 years.
| Starting Salary | Amount paid over the lifetime of the loan | Amount written off after 25 years |
| £10,000.00 | Nil | £129,546.00 |
| £15,000.00 | £3,717.00 | £125,948.00 |
| £20,000.00 | £16,412.00 | £109,955.00 |
| £25,000.00 | £30,826.00 | £90,859.00 |
| £30,000.00 | £45,239.00 | £71,763.00 |
| £35,000.00 | £59,653.00 | £52,667.00 |
| £40,000.00 | £74,067.00 | £33,571.00 |
| £45,000.00 | £88,480.00 | £14,475.00 |
| £50,000.00 | £92,684.00 | £0.00 |
And things only get better; if your daughter or son takes a career break after having children that’s more years where the loan remains unpaid and less time before the 25-year time limit arrives.
Student loans are like no other borrowing. They can be likened to a ‘no win, no fee’ education, in the sense that those who land highly paid jobs may pay their loan in full, but those who don’t gain as much financially from going to university will pay less.
The loan will only be repaid if a graduate has a starting salary of at least £50,000, and that this salary increases at 2% above RPI each year for 25 years. If their salary falls below the threshold at any point, repayments will stop. As you can imagine for many the possibility of maintaining salary increases 2% above RPI is a tall order.
You might be wondering – does the loan affect the students credit score? Well interestingly whilst most credit relationships are picked up by credit scoring companies, student loans aren’t.
In summary, whilst the five figure sums that students are left with following a university education can be daunting, in reality the student loan system works like no other credit facility; students only need to repay it if they earn over the threshold, repayments will increase or decrease according to earnings, repayment is automatic through the tax system, it doesn’t tarnish their credit rating and they won’t be hounded by debt collectors.
Before you reach for the cheque-book to repay the student loan it might be worth considering whether the same funds might not be put to better use as a house deposit or even as a pension contribution.
Categories: Financial Planning, Markets
