Worried about university debt? Student loans are not as bad as you might think

With tuition fees and accommodation costs at their current sky-high levels, many people weighing up going to university are understandably put off by the thought of a mountain of debt to pay off. However, the reality is that student loans are very different from all other forms of debt – the level of earnings at which you have to start repaying is fixed so that each monthly instalment is affordable to those who become eligible to make repayments, while the time limit on the validity of the loan means that many graduates will never have to pay it back in full.

I’ll briefly set out the ways in which student loans make for a better deal than you might think below, but first, a disclaimer: I do not personally believe that marketisation is ultimately compatible with a fair, accessible and high-quality education system, though I also accept that others think differently. There is also much to question in a system which guarantees long-term debt as the cost of education, however it is constructed. Many students and graduates oppose the market doctrine which governs universities and those that do can try to bring change to the system with their votes and wider engagement in our national political life, while other students and graduates think that the system works well enough and can equally say so through democracy. Setting that wider debate aside, it is terrible if people who would otherwise want to go to university are not doing so because they are worried about the financial implications. So accepting that the system is likely to remain the same for UK students for the foreseeable future, let’s look more closely at the ways it can actually work for students who need loans in order to access higher education.

The terms of student loans are actually nothing like a loan

Getting into debt is something to take very seriously, but student loans for tuition and maintenance are very different to what is usually meant by the term ‘loan’. In fact, in terms of how they work, student loans work more like a tax than a loan you might take out from a bank or other money lender. Firstly, you only have to start repaying the loan when you earn over £1,750 a month (£21,000 a year) and then the repayment is just 9% of however much over £21,000 you earn. For example, if your employer pays you £22,000 a year, your student loan repayment would amount to £90 over the course of the year, as it would only be taken as 9% from the £1,000 you earn over £21,000. If you earn £30,000, you will still be repaying 9% of the extra you earn over the £21,000 threshold in that year (so 9% of £9,000). Now, £810 is certainly a lot of money, but you would miss is it less as your overall earnings will have increased – earnings which might not have gotten to that level without you being a university graduate. Student loans are affected by interest linked to inflation, but it is relatively low and the overall value of the loan relative to everything else in the economy will remain the same – again, remember that you only pay back larger sums once you become a high earner, so this shouldn’t be a problem for the people who are earning enough to be eligible to make loan repayments.

If you became unemployed or had to take a pay cut below £21,000, you would stop having to repay the loan. If you never earn as much as £21,000, you will never have to pay any of the loan back. Furthermore, the fact that the loan is repaid through the income tax system means that you don’t have to worry about meeting repayments from the money in your bank accounts, while it also means that debt collectors will never pursue you, whatever happens. And student loans do not appear on credit files – borrowing student finance does not affect your credit rating.

You might never pay it all back – but that won’t be your problem

Let’s look at an example where a student takes out full £9,000 tuition loans for every year of a three-year degree, plus a maintenance loan of £8,200 for three years too. This will mean that her student debts will exceed £50,000 when she graduates – a huge sum. However, it is likely that she will never have to pay the back the full amount. After 30 years, the outstanding debt is wiped whether you have made repayments or have not repaid a penny. If the person in our example has been earning from £21,000 increasing to around £30,000 in that time, she will not have had to repay anywhere near the full amount before the debt is wiped after 30 years. If she does repay the full amount before the debt expires, it’s because she has secured a very high-earning job.

Weirdly, this also means that you are likely to pay far more if you pay tuition fees upfront – for most people it would cost less to take out a tuition loan.

But watch out for the government

The above information is accurate to how the system currently works and the terms and overall structure of the loan cannot be changed, but a lot can happen in 30 years. Parliament remains free to change some rules, even for those who went to university under a previous student finance system. The government has already backtracked on a promise to raise the threshold at which students have to start repaying their loans to above £21,000, meaning that students are already having to repay more of their loans than the government promised would be the case. Sadly, it could undertake such a move again in the future, which makes it all the more important to push for new legislation to protect student loan rates, so that any change would at least be subject to a vote in Parliament. Nonetheless, with the overall structure of the loan set to continue ensuring that student finance bears very little resemblance to a loan, it is a viable option for people who want to expand their knowledge, relationships and prospects by going to university – especially those from low-income families like me who will be unlikely to ever have to repay the full amount.