Like every week, I opened my ITV player and watched the latest episode of The Martin Lewis Money Show (MLMS). You have no idea how lucky the UK people are to have this show available. All of the biggest updates you need to know about in a quick, simple, 30-minute show, I love it. Yesterday, he discussed the latest student loan changes announced by the government.
A bit of warning, this post may piss you off. If it does, as usual, I’m happy to discuss it in the comment section or on Twitter 🙂
Back to MLMS. Everyone was complaining and I was left with a weird feeling, do people not understand how loans work?
Before I share my subjective view, let’s go through the objective facts.
How did a student loan work in the UK until now?
Disclaimer: I did not go to university in the UK, so if I got anything wrong, please let me know and I’ll update it.
You can read the full details on this GOV.UK page, but I’ll try and go through the basics.
You can borrow money for your degree and for some of your living costs (depending on your parent’s income*). That part is pretty straightforward, you take a loan for a specific amount.
Now, the repayment is where things get interesting.
Monthly student loan repayment amount
Until recently, you repaid it via your paycheck by paying 9% of anything you earned over £27,295 a year.
For example, if you earned £30,000 a year, that’s £2,705 over the threshold, so £2,705*9%= £243.45 per year. If you earned £40,000 a year, that’s £12,705 over the threshold, so £12,705*9%= £1,143.45 per year.
I’ve added an Excel-based calculator below if you’re too lazy (woohoo!) to whip out a calculator.
As you can see, the repayment depends on the amount you earn and not how much you borrowed. That’s only the case until you (potentially) pay it off. Once you pay the loan off, you won’t have to make any more student loan payments, pretty obvious.
“But what if you never pay it off?”
Until recently, after 30 years the remaining debt will be forgiven.
Like most loans, you also have to pay interest on that loan. Until recently, the interest rate was 3% + RPI**. If people were complaining about that high rate, I would understand. However, no one’s forcing them to take that loan out.
So far, these were the facts for anyone who started school in 2022. For the 2023 starter, things will be different. Let’s see how.
How will a student loan work from 2023?
As you guessed, the 3 main changes are the monthly repayment amount, the maximum term, and the interest rate.
Monthly student loan repayment:
The 2023 starter will still pay 9% but will start repaying once they earn £25,000 (previously: £27,295).
I’ll save you the examples, just use this calculator (if you’re on your phone or tablet- double click the yellow cell to edit it):
Please notice that for anyone earning over £27,295, the difference will be the £2,295 decrease in the threshold multiplied by 9%. £2,295 * 9% = £206.55.
Side note: If you like working with Excel online, you can practice and improve your skills on Excel Practice Online | Free Excel Exercises (excel-practice-online.com).
For the 2022 starter, after 30 years, the remaining debt would have been forgiven. Now, that has increased to 40 years.
While the 2022 starter had the pay RPI + 3%, the 2023 starter will only pay RPI.
That’s a decrease of 3% in the interest rate.
The response on the Martin Lewis Money show
Martin Lewis focused on the lower threshold and the maximum. There was a sad atmosphere around him and the audience.
One member of the audience said he will reconsider university and may go for an apprenticeship instead. That’s a bit harsh.
Lazy FI Dad’s opinion
What the hell is wrong with people?!
Monthly student loan repayment amount
Yes, you’ll start paying a bit earlier but the maximum increase will be £206.55. That’s £17.21 a month. I know every penny counts, but how material is that amount compared to the benefit you’re getting (discussed below)?
As I explained in my “How to calculate your savings rate?” post, only the interest part of a payment is an expense. That means that not all of the £17.21 is actually an expense. The principal part is an increase in your net worth and should be looked at as saving.
The only caveat to this concept is if you never plan to pay back the loan.
But loans should be repaid, why is this even a discussion?
If you borrow money, you should pay it back (yes, with the interest).
This is the one that worries me the most.
People who are annoyed by this one assume they won’t pay their student loans even after 30 (!) years.
If this is you (or your child), please stop and reassess. Have an honest conversation with yourself or with someone you trust.
Are you going into the right profession/field? Is university definitely the right thing for you?
If you’re planning to spend 3-4 years of your life (and some costs) to get a degree that won’t earn you enough to repay it after 30(!!!!!!) years, how are you so calm about going to university?! Aren’t there any alarms going off in your head?
If you’re doing it for the experience or fun, then treat it just like a holiday. With a holiday, you either save for it or borrow money and repay it. I really hope you don’t borrow money for a holiday, but these are the 2 main options.
In summary, If you plan to earn enough to repay the money you borrowed, the maximum term shouldn’t bother you anyway. The fact that it does bother people, worries me a lot.
As I mentioned, the interest rate went down from RPI +3% to RPI (+0%). This is huge!
Imagine your mortgage (or any other loan) rate going down by 3%, I’d be celebrating like crazy!
The lower interest rate means that more of my payment goes towards the principal, rather than to pay interest. How are students not celebrating this?
One of the students in the (virtual) audience asked Martin Lewis an interesting question. He asked if he should start in 2022 and give up their gap year (he originally planned to start in 2023). If anything, I would try to delay my start for the lower interest rate! Unless I assumed that I will never pay it back and that university will not result in a high income.
We need to define what a student loan really is
I think we need to decide what a student loan is.
If it’s a loan, then it should be paid back and all these changes are fair (and even good).
If we say that it’s a benefit from the government and that’s why it’s forgiven after 30/40 years, I have two issues with that.
First, a degree is not a basic human right, why should everyone have a degree? is it really necessary?
* People chanting “privileged! privileged!” with torches and pitchforks *
If you say that it will help you earn more, that’s fine, then you shouldn’t have a problem repaying it.
Second, we have to remember the government doesn’t have its own money, it all comes from taxes. You will pay for it through your taxes, we all will. However, this can be argued about any other benefit the government pays out.
Student loans increase tuition fees
After my harsh words, I want to change sides for a moment.
Student loans were a good idea, in theory. It was meant to make higher education more available and get people from poorer backgrounds out of that cycle. In the past, only people from wealthy families could afford to pay tuition and not work*** for 3-4 years. It worked, a lot more people now have access to higher education and change their future.
However, just like with cars, financing increased prices.
Do you think the same amount of students would go to university without the existence of student loans? of course not, university costs a lot of money in the UK. Without student loans, universities wouldn’t be able to charge these prices as they would be almost empty. People won’t be able to afford it, the demand would have dropped and as a result, prices would have had to drop as well. I hope you can see the cycle here.
It’s exactly the same with cars. There is no way in hell cars would cost as much as they do if financing weren’t available.
I want to say that property is the same but at least property (as opposed to cars) tends to go up in value.
Reconsider going to university
If I were about to start university and I thought I won’t earn a lot as a result, I’m not sure I would spend (/waste?) 3 (or more) years and give up 9% of my income above the threshold for the experience of going to university. I wouldn’t advise my children to do so either. If, however, I did think it will result in a high income, I would be celebrating the low-interest rate.
The more I think about it, the more I agree with the guy who said he’ll reconsider university. He should’ve realised the cost of the tuition and 3-4 years even before these changes but if these extra £17 a month made him reconsider, maybe that’s a good thing? Maybe this made him stop and think “is it really worth 3-4 years of my life and tens of thousands of pounds in debt?”. Or maybe, he was just told to say that 🙂
Don’t get me wrong, I’m a huge fan of universities and higher education. My degree helped me earn what I do today but these are things I considered BEFORE going to university. If I had chosen another profession, in which I earned less, I’m not sure it would have been worth it (from a financial perspective only).
One of our favourite discussions is “Will we pay for our kids’ tuition?”. Lazy FI Mum says “Yes, whatever they want to study, we should pay for it”. I say “It depends, I don’t want our kids to waste 3-4 years of their life to earn an amount they can earn without doing it. If that’s the case, they’re better off starting their career 3-4 years early”. I will update you in 15+ years (Not promising but I’ll try).
In general, I think people should take more responsibility for their actions. Did you take a loan out? pay it back, it’s that simple.
Also, don’t rely on the government to be there for you. Most people ignore state pension in their retirement models for that exact reason. Instead of relying on the government to forgive your loans, maybe save some money before going to university? Or work part-time during university? If these seem harsh and you’re a parent, plan in advance and save some money for your kids’ university, that’s fine. Just take responsibility for your (and your family’s) life.
The way I see it, all three changes are designed to make more people repay their loans.
The threshold goes down, people will start repaying earlier and are more likely to repay their loans in full. The maximum term gets extended, people will pay for longer and again, are more likely to repay their loans in full. The lower interest rate means that the total amount repaid (assuming you fully repay it) will be lower, making it much easier to repay in full.
I love the UK system. You(/we) have a super-generous ISA allowance and capital gains tax-free allowance. You also have pension freedom, which is incredible. All of these are incentives for people to take responsibility for their finances, save, and invest. I think these changes to the student loans terms are one more move in that direction, to make people take responsibility. I love it.
For a calmer analysis of these changes, with lots of numbers, please see part 2 of this post written one month later.
*This is a weird one as most students are adults (over the age of 18). As an adult, why should my maximum loan amount depend on my parents’ income? It’s kind of assuming my parents will pay for part of my living costs.
** Retail price index, a way to measure inflation
***Of course you can work as a student, I did. However, I understand that a full-time job might be hard to hold while studying.