The 12 Tips Of Christmas – All 12 Tips Of Christmas Posts
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Merry Christmas and welcome to the third post of my 12 Tips Of Christmas series.
These are a series of posts that will be going out on the lead up to Christmas and the New Year to help guide you towards a better money mindset with an aim to give you a base knowledge of personal finance.
Disclaimer – I’m exclusively talking about the UK plan 2 student loan (post-2012) in this post. This will almost certainly be considerably different to any other student loan before this period in the UK or in other country so for information on specifics other than this loan, I’d seek other sources.
Student debt is a contentious issue. This has never been more so than when the cost of tuition fees rose to a maximum £9,000 back in 2012 (now £9,250).
This is before taking into account the cost of living, textbooks and other miscellaneous course fees and any social activities.
Despite the staggering cost now associated with going to university, good career prospects are never guaranteed, especially given the current climate. This isn’t something I’ll go into in too much detail in this post, but decent paying jobs will be out of reach for many who take any course other than STEM or finance related degrees purely due to their oversaturation.
So, the cost of spending an extra 3 years studying could be seen as quite a gamble when weighed against how much this is going to cost your future self. Obviously, there are many other reasons you’d attend Uni, but many people will remain fixated on the huge numbers associated with the costs and immediately decide ‘they’re out’.
I think this is fair enough. University is by no means the only option. There is a lot to be said for learning a trade while earning a wage. Apprenticeships are also not reserved exclusively for manual work now either.
Marketing, finance, HR and the other office-based jobs are increasingly allowing younger individuals, who decided not to go into further education, to earn a wage while they get hands-on experience at the job role related to their qualification.
This is obviously a great alternative and should certainly be considered as an alternative to 3 years at Uni which seems to be the norm now rather than for the brightest few (I’m not saying this is good or bad by the way).
I myself went to Uni too and don’t regret it in the slightest. But I do still find myself defending my decision on a financial level to friends and relatives who know nothing about the ins and outs of how the plan 2 student loan is structured and repaid.
It’s unlike any other form of borrowing
The plan 2 student loan is unlike any other form of borrowing you will ever have done, or will probably ever do, throughout your life.
Your student loan does not appear on your credit report. Mortgage lenders may take into account repayment commitments when considering how much you can borrow, but this alone will not prevent you from getting one.
It’s also not treated like a debt in the traditional sense. Repayments towards the loan are based on a sliding scale related to how much you are currently earning. You will only start repaying the loan in the April after you graduate. You will also pay nothing back until you are earning over ~£26,500. And even then, this is only around 9% above this repayment threshold.
If your income drops below this amount, or you have no income at all for any reason, then repayments are stopped, and will only begin again once you’re back above this income level.
So this essentially works more like a graduate tax, and not really a debt at all.
Furthermore, the debt is written off completely after 30 years or once you turn 65 – whichever comes first. Even if you haven’t repaid a single penny, once those 30 years have surpassed (so for me, for example, that’ll be roughly when I reach 52, having graduated at 21 and being 22 when the next April rolled round to be eligible to start repaying), the debt is no longer owed.
As a result of the average size of the student loan, and the amount you need to be earning as soon as you graduate and consistently earning throughout your career, only around 17% of students will end up paying the full amount back.
This is something to consider when deciding whether or not to overpay on the loan. If there’s a good chance you’ll never pay it all back, and it’ll get written off after 30 years anyway, would that overpayment be better served elsewhere like towards a house deposit, building an investment portfolio or paying down actual debt?
But what about the interest being accumulated?
You’ll receive statements every year from the Student Loan Company (SLC) about the overall value of your student loan and the subsequent interest increasingly being added to the outstanding amount.
Just sending these statements has become quite controversial. With the huge numbers involved, and the majority of graduates who will never pay it off, it begs the question, “What’s the point?!”. This is just serving to worry those less in the know about how their student loan is structured and what is expected of them in terms of repayments. Could graduates with a loan be sent something that serves a better purpose than just, “LOOK HOW MUCH MONEY YOU OWE…PANIC…PANIC….PANIC”?
The current interest rate on a plan 2 loan increased in September to 5.6%. This is far higher than many mortgage rates and much higher than previous student loans prior to 2012.
The interest is based on the RPI (Retail Price Index) +3% depending on how much you earn. If you’re under the £26,500 repayment threshold, the interest is just = RPI. If you earn over, then the interest is = RPI +3%.
Being based on the RPI, this can change every September so it’s not fixed or guaranteed how much interest will be added to your balance year on year.
For example, the interest rate charged for someone earning under the threshold has fluctuated from 0.9% in 2015/16 to 3.6% in 2012/13 (+3% for those still studying or those earning over the threshold).
This further strengthens the argument for not overpaying and just letting it tick over.
What’s more, the amount you repay (if you’re over the income repayment threshold), is never impacted by the amount of interest being added to the balance each month/ year; it’s always a flat rate of 9% on any income over £26,500.
For example, if you earn £27,000, you’ll pay 9% on the £500 and nothing on the other £26,500; very similar to how income tax is calculated. This does not change whether you’re earning £27,000 or £100,000, or if you’ve accumulated £1 of interest or £1million of interest (exaggerating for emphasis).
You can see how many people can become confused.
The biggest damage plan 2 student debt can have on someone is more psychological than it is financial. If the only ‘real’ cost to someone with student loan debt is a 9% charged on anything above the income threshold for 30 years, it’s a lot less scary than some of the numbers and expectations being thrown around in the US with their student loan system.
Those numbers can be even larger, and there is an expectation that this MUST be repaid at some point, somehow.
There’s a safety net with the UK plan 2 system. Earn below the income threshold at any point and all repayment commitments stop. Just make sure your details are all up to date on the SLC portal to avoid any potential oversights.
All in all, plan 2 student loans, despite their numbers, should not be this big financial burden that the SLC statements seem to want graduates to think they are.
Consider it a flexible graduate tax on only a portion of your income and you’ll feel the psychological burden ease somewhat.
Martin Lewis has some excellent articles on his site, Money Saving Expert. Be sure to head over there for much more detail/info if you’re still concerned.