The truth about student loans

Freshers heading to university this autumn can expect to pay more for their higher education than students graduating this summer, but paying off student loans doesn’t always make financial sense.

Tuition fees haven’t increased, but the way students in England repay these loans has changed. Different rules apply in Scotland, Wales and Northern Ireland, where students will generally pay less. Changes took effect last year, so won’t impact students who began degrees before September 2023. However, new students will experience significant differences in how they repay their loans compared to those who have just graduated.

Headline figures around student loans can sound alarming, with graduates currently leaving with average debts of £45,600, with some students owing £60,000, once tuition fees and maintenance costs are taken into account.

Student debt differs from conventional loans, credit cards or overdrafts, with repayments being a fixed percentage of earnings, not a proportion of the total debt. In practical terms, this means a graduate earning £30,000 a year will repay the same monthly amount, whether their student loan is £5,000, £50,000 or £150,000. The other crucial difference is that unpaid debt is cancelled after a set date.

How it works

Previously, graduates started repaying this debt once their earnings hit £27,295 a year. Under the revised rules, the earnings threshold kicks in earlier, at £25,000, with the same 9% rate of earnings over this threshold maintained. On a £30,000 annual salary, future graduates now repay £450 a year (£37.50 a month) compared to £243.45 a year (about £20.28 a month) under the old system.

The other significant change is that graduates will repay these loans for 40 rather than 30 years. This means an 18-year old embarking on a degree may still be repaying student loans into their 60s. It also means that those on more modest incomes will end up paying more, as they will be making these monthly payments for longer. Graduates on the highest salaries will be repaying more each month, so are likely to clear their debt well within the original 30-year term. B

It isn’t all bad news though. The government has changed the way interest is added to these loans. Under the old terms, the maximum interest was inflation, as measured by the Retail Price Index (RPI) plus three percentage points. This will now be capped at RPI. Under both the new and old rules, this interest is added to a student loan from day one of their studies.

Other key elements of student finance remain the same. Loans cover tuition fees of £9,250 a year (in England, £9,000 in Wales), plus any maintenance loan. For 2024/25 this is a maximum of £10,227 if living way from home; higher amounts are paid to London students. But this is means-tested on parental income, so many receive less. In Scotland tuition fees of £1,820 are generally paid by the Scottish government.

Regardless of the changes, focusing on paying down these debts doesn’t usually pay off and graduates, parents or grandparents are generally advised to focus financial help elsewhere. The amount deducted from an individual’s pay packet each month will not be reduced, so won’t ease any short-term cash flow problems. It won’t necessarily mean loans get repaid earlier either. Although the new terms are less generous to students, it is still estimated that 48% of graduates won’t pay off their debt in full, so will have loans written off at the end of the 40-year period.

Financial Planner, Lydia Richmond suggests that: “while the recent changes to the student loan system aim to make repayments more manageable in the short term, they also extend the repayment period, potentially increasing the overall cost for lower earners. The new system requires careful consideration, especially when it comes to decisions about early repayment. 

As advisers, we often get asked about student loan repayments and whether or not to repay them early. It’s essential to weigh the long-term implications before deciding whether early repayment is the best course of action. This is something that generally has to be based on the individuals specific circumstances, as whilst repaying early may be suitable for some, it may not be realistic or cost effective for others.”

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Source: TaxBriefs