A month ago, I wrote a quite-angry post about the student loan changes and the criticism against them. That was part 1. A month later, I am calmer and ready to dive deeper into the numbers.
In part 1, we saw that the maximum annual increase will be £206.55, which is £17.21 per month.
Part 1 also included a calculator that you can use to see how much you’d pay under the old rules and under the new rules. However, it ignored the fact that the new rules mean you’ll pay for a maximum of 40 years, as opposed to 30 years under the old rules.
For more detail about the changes to the rules, please read part 1.
So, let’s check the numbers and try to decide: are UK students whiny?
How much (on average) do you need to earn to pay off your student loan?
When it comes to numerical questions, I usually turn to Excel. This is not an exception, so I created the “Different salary” model.
In the “Different salary” model, you can calculate what average annual salary you would need to earn to pay off your student loan within the relevant period (30 years for the old scheme, 40 years for the new scheme) given a specific annual inflation (RPI) rate.
I also added the total amount repaid in case you’re interested in that.
I’ve shared the model with you (below) because I don’t want you to waste time and do something I already did (we’re all about efficient laziness here).
As usual, you can only edit the yellow cells (if you’re on your phone- double click a yellow cell to edit it).
As this model has lots of rows, I recommend downloading a copy of the file and playing with it on a computer. The same applies to the “Same salary model”, which you’ll read about shortly (below).
Conclusions from “Different salary”model
I used a £60,000 student loan (the example Martin Lewis used in his show) and a 2% annual RPI.
To pay the student loan off, you would need an average annual salary of £69,699.42 under the old rules.
Under the new rules, the amount goes down to £49,149.92, which means a lot more people will pay their student loans off.
However, if we change the loan amount to £27,750 the amount goes down to £46,907.04 under the old rules and £36,169.34. Much more reasonable. I looked at £27,750 as it’s the annual university tuition cap (£9,250) timed by three for a three-year degree.
Anything above that amount is living expenses. If you’re complaining about having to repay rent and living expenses, I’m probably putting you in the whiny category.
Finally, if you’re very into the small details, I added a full amortization schedule for both scenarios.
Second model (“Same salary”)
In the second model (“Same salary”) I wanted to see what happens if you assume the same salary but compare the old rules to the new ones. I also added a full amortization schedule for both scenarios in this tab. My thinking behind this tab was: “Let’s say I have a forecast for an average salary, which rules are better for me?”
Assuming 2% annual RPI, that amount is £56,214.84.
If you’ll earn more than £56,214.84 on average- you’re better off under the new rules. When I say “better off”, I mean you’ll pay a smaller total amount before paying off your student loan (or reaching the forgiveness date).
If you’ll earn less than £56,214.84 on average- you’re better off under the old rules.
However, this whole model assumes you’ll work until you reach the forgiveness date or until you pay it off. If you’re planning on early retirement, all you probably care about is the monthly payment as you’ll probably not pay it off anyway. For that reason, FIRE people probably prefer the old rules.
It seems like it’s a question of how ambitious (financially) you are in your career. If you’re aiming for a high income, the new rules are probably better for you.
It is important to remember that the rules are set so you don’t really have a choice, do you?
You do have a choice! If you’re a student considering starting in 2022 or taking a gap year and starting in 2023, that’s a real choice, and not one to overlook.
Are UK students whiny?
Yes and no. On one hand, the UK median salary is around £31,000-£32,000 (source). That means that half of the people in the UK earn less than that. If we said the break-even salary is around £56,000, less than 20% of UK full time-employees earn that (source). That means over 80% of people won’t be able to fully pay back their student loans, especially as I assumed an average salary.
Does that mean 80% are right to complain? should they, instead, aim for a higher? I’ll leave that for you to decide.
The one thing that does jump out from the 2 models is that, due to the lower interest under the new rules, if you are going to pay it in full, you will pay less. As I’m a huge fan of incentivising people to succeed and take responsibility (which is why I love the ISA allowance), I think I’m still a fan of the new rules but that’s just my opinion.
If you want to practice Excel online (without installing Excel on your laptop), you can go here:
No, I don’t own the website, run it, or get anything out of you heading there.