With the deadlines looming for student finance and loan applications, have you considered how you can prepare for your children’s higher education? The topic of student loan repayments has hit the headlines once again as the government’s ‘fiscal drag’ continues, even hitting university students.

But what is fiscal drag? And how is it connected to student loans and your family’s financial planning?

Fiscal drag is a situation in which the Treasury attempt to raise more revenue without specifically announcing a tax increase. The Government applies a freeze, so the levels at which we pay our income tax increase more slowly than inflation.

In the case of student finance, the Chancellor has his eyes on a huge £2.3 billion clawback.

As for the connection to graduate debt and student loan repayments, this Treasury tactic leaves a significant, and potentially expensive, cloud over Graduation ceremonies for many years to come.

In this article, we are going to explain more about student loans; how the latest update from the Treasury will impact existing student loan repayments; and how you can ease your concerns about the future cost of higher education for your children and grandchildren by incorporating it as early as possible within your family’s financial planning.

 

What does this update mean for existing student loan repayments?

 For students from England and Wales, whose courses started in or after September 2012, the level of income at which they must begin repaying their outstanding student loans has been frozen for 2022/2023.

But for the government overruling the legislated ‘theoretical’ increase of 4.6%, it would have risen from £27,295 to £28,550 saving graduates, with enough earnings, about £113 per year in student loan repayments at the standard rate of 9%.

The government anticipated that before this student loan repayment threshold freeze, only 25% of current full-time undergraduates with a student loan would repay in full.

However, they now expect over 50% of the new student cohorts to be in a position to make full repayment.

 

How do student loans work?

Student loans in England are the main method of providing undergraduate student finance.

The money is loaned from the government, at a subsidised rate, to cover tuition fees and assist with maintenance costs during university.

Recent figures revealed a figure of almost £20 billion is loaned to around 1.5 million students in England on an annual basis, and the value of outstanding student loans at the end of March 2021 stood at £141 billion.

An important point to note is that student loans are not restricted to full-time students only. Part-time students can also apply for tuition fee Student Loans Company loans, ranging from £4,500 to £6,935 in 2022/2023.

Once an application has been accepted, the loan is paid directly into the student’s bank account at the start of the first term. As the application can take a few weeks, the Student Loans Company (who makes the payment) advises applying as early as possible, even if the university place is not yet secure, to ensure funds are in place at the beginning of the term.

 

What other forms of student funding are available?

There are of course other costs incurred during life at university. Increasing costs of living, food, travel, stationery supplies, and books all need to be accounted for.

So, for those who started studying after August 2018, maintenance loans or grants are available.

We would point out, though, that this form of funding is means-tested, so eligibility is calculated based on the student’s age, the parents’ or partners’ income, and their living arrangements.

Students living at home (starting their course in the 2022/2023 academic year) - minimum loan of £3,597 to a maximum of £8,171

Students living away from home, outside London – minimum loan of £4,534 to a maximum of £9,706

Students living away from home and studying in London – minimum loan of £6,308 to a maximum of £12,667

The difference between the loan amount each student receives, and the maximum possible payment, is ‘expected’ to be covered by parental or partner contribution. This we will come back to!

If the thought of your child taking out student loans causes you concern, read on! It might not be quite as daunting as you think.

 

 

Student loans repayment process

The requirement for undergraduate student loan repayments is dependent on income after graduation or leaving university. Repayments are mandatory when graduates exceed the income threshold of £27,295 per year, fixed at a rate of 9% of income above that figure.

Postgraduates can apply for a Postgraduate Student Loan whilst studying for a master’s degree, for instance. This is repaid at 6% of any income above the current, unchanged, threshold of £21,000.

In cases where the graduate’s income is less than the threshold, no payment is required.

The student loan repayment process is slightly different from a personal loan. One thing is that the repayment amount each month is taken at source, just like paying tax. The responsibility for making the payment is taken out of the hands of the graduate, so there is no opportunity to spend the money that is due. This also means that no debt collectors can be involved if any payments are missed.

Another positive is that student loans do not go on credit files. So, this type of debt will not impact such things as mortgage applications.

Any remaining debt from the student loan is wiped after 30 years if it has not been cleared by then.

 

Is it worth repaying a student loan early?

It is possible to repay a student loan early.

However, unlike other debts which we would generally recommend clearing as soon as possible, student loan repayments in full are not always the most financially efficient route to take.

As we have explained above, student loans are treated separately from other loans or debt, so we would recommend following the student loan repayment plan for as long as income allows.

 

Why seek expert student loan repayment advice?

We mentioned parental or partner contribution earlier, which is where the shortfall between any student loan and the actual living costs is expected to come from.

Tempting as it may be to focus on other aspects of your finances, our expert independent financial advisors are often called upon to review family financial circumstances where the cost of education, further education, and student debt have been omitted years before.

Simpson Financial Services prides itself on the knowledge and experience we can combine to support all your financial planning – no matter how young or old you are when you first contact us.

We keep up to date with market fluctuations, and legislative economic changes, and do the hard work for you to manage your financial portfolio and bespoke financial planning to suit your individual needs.

Whether you are considering studying personally, or planning ahead for your children’s or grandchildren’s education, the impact of student finance is one that should be included within your personal financial planning.

If student loan repayment is a concern to you now, or for your family’s future financial prospects, we strongly advise seeking expert advice. So, make the call to Simpson Financial Services today, and have a chat with one of our friendly team to ease your burden.