The Covid-19 pandemic has changed the way higher education is delivered, with a new emphasis on online learning mixed with some in-person teaching. But this hasn’t reduced the cost of going to university and the debt that will come with it.
This autumn sees the latest intake of undergraduates begin their studies. Most students in England will have taken out tuition loans (of up to £9,250 a year) plus maintenance loans to cover living costs. Different systems apply in the devolved nations, with Scottish students charged up to £1,820 a year in tuition fees at Scottish institutions.
In general, it usually makes sense to use surplus funds to pay off debts early. But graduates – or parents looking to help out – should think carefully before using capital to repay student loans. This is because of the way repayments are structured, with any outstanding debt wiped out after 30 years.
Student loans attract interest like any other debt. This is charged when students are studying, at a rate of the Retail Prices Index (RPI) plus 3%— giving a current rate of 5.4%, with rates afterwards dependent on earnings.
Repayments on student loans only start once graduate salaries reach a certain threshold. For the 2020/21 year this is £2,214 a month — or around £26,500 a year. Students then pay 9% of their salary over this amount. So those earning £3,000 a month will pay 9% of £786 — or £70.74 a month. This is the same monthly repayment whether they owe £20,000 or £80,000 — so paying off a chunk of capital will not reduce this monthly bill.
The larger the loan, the longer it will take to repay. But this still does not necessarily mean students will pay back more overall, as current projections suggest that 83% of students who have taken out a loan since 2012 (when this system was introduced) will not repay the full amount.
For these students there may be little financial benefit to paying part of this debt off early: it will not reduce monthly repayments and may simply mean a smaller sum is written off at the end of the term.