Loans Guide

The low down on student loans

By Becca Talbot becca.talbot@consumerchoices.co.uk (updated 12/03/10)

Students can now graduate with thousands of pounds of debt.

Millions of students take out loans with the Student Loans Company covering tuition fees, top-up fees and living expenses and it’s reported university leavers finish with debts over £15,000. So, is being a student and being in debt inevitable?

The short answer is no. Some students can leave university with very little debt. It really all depends on how you manage yourself, and your finances. Taking out a student loan is one option to help fund your studies, and all the other things that come with university life…

• What is a Student Loan?
• What is available to you?
• “What about paying it back?”
• The alternatives
• Do you really need one?
• Our Recommendations

What is a Student Loan?

The prospect of starting university can be rather daunting. Renowned for their reputation of being lazy, idle and slobbish, becoming a student may seem all but attractive. Couple this with thoughts of expensive tuition fees and mounting debts, and you may suddenly find yourself shying away from the idea of Higher Education.

Starting university shouldn’t be a chore, especially where finances are concerned. The first step is to draw up a budget for your student life, working out how much further education will cost you. You’ll need to consider tuition fees, accommodation and living costs.

British undergraduate and PGCE (Post Graduate Certificate of Education) students can apply for a loan through their local education authority (LEA) in England and Wales, the Student Awards Agency for Scotland (SAAS), or their local education and library board in Northern Ireland.

For the majority of students, taking out a loan from the Student Loans Company (SLC) will help pay their tuition fees, their living arrangements and fund their student life. The SLC administers government-funded loans and grants to students throughout the UK.

The financial help you can get depends on the course you are doing, where you live while you are studying, and your individual circumstances.

The money you borrow will be paid in three installments, directly into your account at the start of each academic term. Or, if you feel that with the money just sitting there you may spend it on things it’s not meant for, you can choose to have it paid straight to your university to cover your tuition fees, if you set up this funding when you enroll.

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What is available to you?

If you are on an eligible course, you will automatically qualify for 75% of the maximum loan entitlement, regardless of your current financial situation. The other 25% is income-assessed, meaning you could be entitled to a larger loan if your parents or your own income is less than the average household income.

The table below shows what new, full-time higher education students, as well as those who started in 2006/2007, could be eligible for:

As well as the Student Loan, you could be entitled to a grant, bursary or scholarship.

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“What about paying it back?”

If you’re worried about how you’re going to pay back your Student Loan after you finish university, don’t be. Student Loans offer a low rate of interest – matching inflation - and don’t have to be paid back until you’re employed and earning enough money to be able to afford the repayments.

Student loan repayments are made in one of three ways, according to what type of employment situation you are in:

• PAYE (Pay as You Earn): if you are employed, student loan deductions are made automatically from your salary.
• Self Assessment: if you are self-employed, or a combination of employed and self-employed, you will be responsible for calculating and making your own repayments.
• Overseas: if you work or are planning to work abroad, you will be required to make a repayment arrangement with the SLC.

Fees and interest:

Student loans accrue interest at the rate of inflation, meaning the amount repaid has the same value as the amount borrowed.

If you take out a student loan, like the majority of students, you will probably repay it through the tax system, so there’s no worry about arranging your own repayments. The repayments will automatically come out of your wages, and will normally start on 6 April after you’ve graduated, or stopped attending your course.

The repayment threshold for student loans, before deductions, is currently:

• £15,000 a year

This is equivalent to:

• £1,250 per month or
• £288 per week

If your income is equal to or exceeds these amounts, you will be required to make repayments. The size of the repayment will depend on the amount you’re earning over the threshold. For example, if you’re basic salary is £18,000 a year, you’re student loan will be paid back at 9%, meaning monthly repayments of £22.50.

If you receive any disability-related benefits they will not be counted towards the £15,000 threshold, even if they are taxable, and if you receive a disability-related benefit and are permanently unfit for work, your loan will be cancelled.

If you want to, you can pay off your loan by making repayments directly to the Student Loans Company, whether or not your income is above the repayment threshold. But remember, the interest rate for what you have to pay back will not change, so it’s worth just holding on to your money and making the minimum repayments.

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The alternatives

There are several alternatives to getting a Student Loan to help fund your education, pay for your accommodation and support your living costs. You may be eligible for one of more of these:

1. Grants to help with accommodation and other living costs - As well as Student Loans, you may be able to get a Maintenance Grant or Special Support Grant to help with your accommodation and other living costs. This won’t have to be paid back. Whether you can get one depends on your household income.
2. Bursaries - You may be able to get extra help through a bursary. Your university or college may be able to offer you financial support in a variety of ways - for example, as payments into your bank account or a discount on accommodation costs. Publicly-funded universities charging full tuition fees have to give you a bursary if you’re getting the full Maintenance Grant or Special Support Grant.
3. Scholarships and awards - Some universities and colleges offer scholarships. These can be based on your income, your A level results or on other criteria, such as outstanding achievement in sport. Check with the institute you’re applying to and see what’s available. Charities and educational trusts may also be willing to award you extra financial help. Contact Citizens Advice Bureau for more information. Charity turn2us.org.uk also offers a searchable database of grants from charities.

You don’t have to pay back any money you get through a bursary, scholarship or award.

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“Do I really need a Student Loan?”

When enrolling at university, every student is entitled to take out a Student Loan to cover tuition fees; but it’s entirely your choice whether you do or not.

If they are extremely generous, your parents may offer to fund your first year. Or if you’re thinking of applying to a particular company when you finish your degree, or you’re already employed with the company, they may cover the cost of your course as part of training for the job. BAA and AWE are both companies that offer these initiatives, working on the basis that if they pay for your education, you will in turn work for them for a specified time period.

If you’re already at university, and have taken out a Student Loan, you’re not obliged to carry the loan on for the duration of your course. If you’re taking a year out for example, or have a work placement year, you may find that you won’t need your loan instalments that year, and can cut down the amount you borrow by not taking out the loan that year.

Even if you think you won’t need a Student Loan (maybe because you’ve worked at McDonald’s all summer, saving your pennies!), sometimes it can still be worth taking one out.

As the interest rates on repayments are very low, and you don’t have to pay it back until you’re earning over the threshold, taking one out and putting it into a high-rate Savings Account or an ISA could earn you a tidy profit in interest.

Playing the system like this is a good way of earning some extra money, which effectively could cover the interest you have to pay on your loan repayments. However, make sure the savings rate beats inflation – the rate the loan is charged at.

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Our Recommendations

• It’s best to apply for student finance as soon as possible - the earlier you apply the better your chances of getting your payment in plenty of time.
• When you have started repaying your Student Loan, the SLC will issue you a yearly statement, detailing how much has been paid and how much is outstanding. If you want to know how much you have repaid between statements, you can find out by looking at your pay slips or P60 to see how much you have paid in the last months, and then deduct this from the balance on your last SLC statement, making an allowance for interest.

Chris Eagle of ConsumerChoices.co.uk says: “Apply for the maximum loan amount possible and learn to budget it. Don’t fret too much about SLC debts, as you don’t have to start repaying them until you earn over £15,000 a year, and the interest rate is lower than almost every other method of borrowing.”

All that being said, Chris advises: “If you don’t want to end up begging at the feet of the strict loan officers of the 'Bank of Mum and Dad', then try not to blow your student loan in the first couple of weeks. Try to stretch it out over as much of the semester as you can.”

Useful Links: Direct.gov.uk Student Loans Company