Student Loans – a Tax on the Intelligent

May 6, 2015


By Lyndsey Hall


With the cost of a University education constantly on the up, many prospective students, and their parents, are worrying about graduating with a mountain of debt that they will be repaying for the rest of their lives.


While this isn’t exactly untrue, it isn’t quite as bad as it sounds. In fact, those of us who went to University before 2012, when the Tuition Fees began to climb, could end up paying more back than many students who start their course in September this year. And anyone who has student debt from before 1998 could be in an even worse position than today’s teens.


How will I repay my loan?


The loans offered to students prior to 1998 functioned like mortgages, and repayments were made by Direct Debit from the student’s bank account. Firstly, this meant that the graduates who took out these loans were being taxed on their income before the repayments were being made. Fortunately for modern day students, the new system deducts repayments before tax, along with your National Insurance, so you will receive more of your own money each month.


Secondly, in 2013, the government sold the £900m of outstanding loans from students who began their course between 1990 and 1998 to Erudio Student Loans Ltd, who operate in a similar way to a debt collection company and have subsequently written out to all who are behind on their loan repayments, demanding money. Luckily, this will never happen with the new student loan system, as your employer is responsible for ensuring the correct amount is deducted before tax each month.


How much will I repay?


In 2012, the income threshold before repayments began was increased from £16,910 to £21,000, meaning that anyone who started a course after 2012 won’t pay a penny to the Student Loans Company until they earn over £21,000. And this threshold is due to increase to £22,000 in 2017. Unfortunately for those of us who graduated between 1998 and 2012, we will be charged 9% on anything above the £16,910, so we will pay £368 per year back before more recent graduates will pay a penny.


Once you are earning above the threshold, you will start to make repayments. These will be based on your salary, so the lowest earners pay the least per month, and the highest earners pay the most per month. As the debt is cancelled after 30 years, even if it has not been repaid, this means that many low earners will never pay the full amount back, if anything. The highest earners will benefit from saving money on interest, as they will be paying the loan back at a much faster rate. This means that middle earners will end up paying the most over the course of their loan, as they will pay less per month than the high earners, but their debt will be spread over many more years, allowing the interest to build.


According to Money Saving Expert, the students who will end up paying the most on average are those who graduate with a starting salary of around £41,000. You can use the Student Finance Calculator to see what you might pay. 


More like a graduate tax than a loan


According to Martin Lewis, the new student loans are more like a graduate tax, and shouldn’t be considered a ‘debt’. The repayments are taken straight out of your salary before tax; the monthly amount will only increase if your wages do; you’ll never be chased by a debt collector, even if you are unemployed and pay nothing; and most people will never pay the full loan off before the 30 year deadline. Not only that, but your repayments will be the same as everyone else who earns what you earn, no matter how much you have borrowed; and it won’t affect your credit file, so you can still get a mortgage without your student debt being taken into consideration.


In fact, it is usually cheaper to take the loan than to pay your fees with cash, so any parents wondering how they will pay for their child’s university education need not worry; you won’t have to! If your child is eligible for a student loan, it could be more economical to let them pay the monthly sum once they graduate and start earning over £21,000 (£22,000 from 2017).


So there you have it: next time little Johnny complains that University is too expensive and he doesn’t want to go, print out this blog post and show him why it’s nothing more than a 30 year tax on the intelligent!


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