It’s that time of year again! Exams are coming to an end and the thoughts of many students turn toward University – Freedom, freshers week, and fun.
For parents (and students) there’s also the issue of finance. Who’s paying for the next three years? Should loans be taken out? Should we ‘stump up’ in advance?
From September 2017, for students from England and Wales, the headline Student Loan interest rate stood at 6.1% pa and is the interest which will be charged whilst studying. Once graduated the interest rate charged will be on a sliding scale from the Retail Prices Index (RPI) if earning less than £25,000 pa to RPI plus up to 3% if earning more than £45,000 pa – with a sliding scale in between.
This rate is ‘a commercial rate of interest’, although higher than most mortgages and personal loans. Given such a high headline rate it’s no surprise that many parents and students feel that it’s sensible to not take the loan if at all possible.
The truth is though that whilst it is a commercial rate of interest it’s not a commercial loan. Unlike a mortgage or personal loan, a Student Loan will only start to be repaid when a graduate earns above a certain threshold – £25,000 pa at present – and then only at 9% of salary above the threshold. In addition Student Loans, unlike other loans, will be written off 30 years after becoming eligible to repay, before then if the individual becomes disabled and permanently unable to work, or on death.
The relatively high interest rate combined with the write-off terms means that for a great number of students, especially those who may be looking at professions that don’t necessarily lead to high salaries, there is a strong chance that they will never be repaid. Writing these debts off after 30 years makes it more of a graduate tax and less of a loan repayment.
It’s never an easy decision to take on debt, but in this case it’s definitely worth doing your homework before you reach for the cheque book.
Eldon remains here for clients, to check your sums if you want us to.