Student Loans

Back in the mists of time when I was a student, in the mid 1980s, student loans were just a Conservative Party wish list item. I was lucky enough to get a full grant from my local education authority (LEA) which was just about enough to survive on. Of course, students have always needed more money than they had available (and always will!) and we financed this through overdrafts, part-time and summer vacation working or, if you were lucky enough, rich and indulgent parents. In those days, only a very small proportion of us took out student loans with the local high street banks. These student loans were more of the nature of personal loans (often underwritten by the student’s parents) and did not enjoy any special conditions, in general.

Whereas former UK governments had taken the view that education was a right and not a privilege, Mrs Thatcher, the then Conservative Prime minister, took a different view. It had been believed that attending a UK university would mean that the graduate would get a better job than his peers who went straight into the workforce after leaving school. As a consequence, they would earn more money and pay more taxes, so contributing to the public purse for the cost of their education throughout their working lives. But in the 80’s, the times they were a changing! At first, student loans were proposed as a “top up” measure to support the inadequate LEA grant.

The idea that students should contribute to the cost of their education with fees crept in and the era of the student loan was born – after all, the Conservatives argued, students in the USA had followed the system for years. Nowadays, anyone going into higher education is likely to have to have a student loan.

The UK government has set up a public sector organization, the Student Loans Company (SLC), which provides financial services such as student loans and grants to students studying in the UK. They handle over a million students each year and are also responsible for the administration of the collection of repayments for more than two million graduates. Most student loans are made up of two components: a tuition fee loan and a maintenance (or living costs) loan.

For the majority of students in higher education, their courses will make them eligible for a student loan. Such students are entitled to 75% of the maximum loan, regardless of their personal income with the remainder of the loan being means-tested. These days, for most people, student loans seem to be the only feasible way to pursue higher studies for the average student in UK. Universities can charge students a maximum of £3145 per year and most UK undergraduate degrees have a duration of three years.

The maximum amount that you can borrow on a UK student loan is £4625 for courses outside the London area or £6475 for courses in the capital. So, if you were studying for a first degree in London, the maximum debt you could expect to have upon graduation would be £28860. The loan APR (annual percentage rate, or interest) is fixed at the official rate of UK inflation which means (in principle, at any rate!) that the amount to be repaid has the same value as the amount borrowed. Once the student has graduated and has employment paying more than £15000 per year, the loan must be repaid through the UK tax system. Once this income level is reached, you will pay 9% of your income above the threshold level, until the debt is paid off. If you are self-employed, you will be responsible for calculating and making your own repayments on your self-assessment tax return.

If you work overseas, you need to make a repayment arrangement with the SLC. You can also make additional loan repayments by paying the SLC directly, whether or not your income is above the repayment threshold. Of course, if the interest rate that you could earn on money you have deposited in the bank or stock market pays above inflation (and it should) then you’d be foolish to pay your student loan off early. I can’t help but look back on my college days with a warm feeling of nostalgia for a kinder age before the evil of the “market forces” mantra was unleashed on an unsuspecting world!