The Way We Talk About Student Debt In The UK Is All Wrong

I read an article this morning called: ‘Graduates say their inescapable student loan debt is a life sentence that affects their everyday decisions.’

Citing a poll carried out by Splash Financial, the piece says: “The majority of people with a degree see their debt as an inescapable financial burden that negatively affects their everyday life.”

82% of the poll’s respondents said their debt affects major life decisions, 43% said that buying a house was a financial impossibility, and 43% said their loans prevented them saving for retirement.

Respondents claimed that due to the stress of their student debt, they felt forced to make sacrifices such as “skipping socialising, picking up side hustles, intense budget plans, skipping loved ones’ life events such as weddings or births to avoid travel costs, and taking a job they absolutely hate.”

There’s just one problem… what Metro doesn’t point out is that the survey’s respondents were based in the US, where student debt operates differently to here in the UK.

While US student debt is a huge cause for concern and a source of significant financial stress, here in the UK, there is no need for people with this kind of debt to panic, make any irrational decisions, sacrifice saving for retirement, or assume they can’t buy a house.

I’m not for a second suggesting student debt is a good thing. Who wouldn’t prefer to keep that money in their pocket? However, as a bloke called Gareth points out in the comments, the Metro article seems to make a mountain out of a molehill. (Though his comment about default pension contributions isn’t necessarily correct)

The Metro’s article isn’t the first of its kind. UK publications share misleading information surrounding student loans all the time and when you do a deep dive into the complexities of these unnecessarily complicated loans, it’s easy to see why people get things wrong and misinformation is spread.

Let me explain…

Why is this information misleading?

I’ll start by introducing you to this epic Question Time rant from Martin Lewis. It perfectly sums up the problem. Speaking on post-2012 student loans, Martin said: “I’ve watched Question Time debate tuition fees for the last 5 years and I’ve thrown more socks at the television every time it’s been mis-explained than I can possibly tell you.

“When you get your student finance it works not like a loan but like a graduate contribution system. You repay 9% of everything you earn over 25 grand. So let’s be plain: borrow £20,000, earn £30,000, and you repay £450 a year. Borrow £50,000, earn £30,000, and you repay £450 a year. If they put tuition fees up to a million quid, so you’ve borrowed £3 million pounds, you earn £30,000, you repay £450 a year. You will probably do that for 30 years like a graduate contribution system.

“It has a very minor effect on your disposable income, having a tuition fee and maintenance loan combined. It does not go on your credit file. It is effectively like mildly increasing the amount of tax that you pay, just like increasing pension contributions also decreases your disposable income. It is not a big issue for getting a mortgage. The biggest issue that young people face for getting a home is primarily building a deposit to get there while they’re renting because renting is too expensive. Tuition fees are a red herring.”

How is inaccurate student debt information damaging?

When student loans are explained incorrectly or portrayed in a sensationalised light, this can put people under unnecessary stress and exasperate depression and anxiety.

It can encourage people to unnecessarily prioritise student debt overpayments instead of pension savings, emergency savings, or deposit savings.

It can pressure people to take out loans to repay student debt early.

It can inspire parents to make personal sacrifices to their own finances and jeopardise their financial wellbeing in order to pay their children’s tuition fees.

Misinformation surrounding student debt could even persuade people not to attend university at all, preventing social mobility and depriving disadvantaged students from an education that could transform their life.

In his Question Time rant, Martin Lewis added:“Politicians do this all the time. [They make their political point and they] put off young people from underprivileged backgrounds from going to university with a fear of debt.

“[They’re] framing it as a debt when it doesn’t work like that. Politicians need to take responsibility. All the parties have miseducated a generation about how student finance works and it is an abomination. [They] should all hold [their] heads in shame because there are people from poor backgrounds on television saying “I can’t afford to go to university.” Well, you know what, it is expensive. It’s an increased form of taxation when you leave, but it is not a debt. It shouldn’t be called a debt. It should be called a graduate contribution system.”

I’m embarrassed to admit I spent a very long time believing much of the anti-student loan narrative myself but having spent some time educating myself on how the system actually operates, it angers me how we’ve been misled. I feel like an idiot for not realising how UK student loans work sooner, but I’m not the only one who’s been fooled. Thankfully, as this comment on the Metro piece shows, there are people who get it…

How much do student loans actually cost?

Politicians and the press like to tell us student debt horror stories where graduates find themselves in £50,000 or £60,000 worth of debt.

However, the amount you owe differs to what you’ll actually pay. No matter how much you owe, the amount you’ll pay back each month is restricted and based on your income. This means that your debts won’t spiral out of control like they could with credit card debt or bank loans. Interest will be added, yes, but you might not even need to repay it - particularly if you have a post 2012 loan.

To work out how much your student loan is actually likely to cost you each month, you need to work out whether you have a Plan 1 loan or a Plan 2 loan. The two operate differently.

Plan 1 loan

If you started uni between 1998 and 2012 or if you’re from Scotland or Northern Ireland, you have a ‘Plan 1’ loan.

With a Plan 1 loan, you won’t start paying it back until you earn £18,935. When you reach this salary level, your student debt repayments will be 9% of everything you earn above this figure. So, if you earn £19,835, for example, you’ll pay £90 a year to the student loans company.

Interest is based on inflation or the Bank of England Base Rate + 1% - whichever is lower. This is the cheapest loan you’ll ever get.

The debt will be wiped after a certain period of time, the exact time will vary based on your circumstances. You can learn more in the video below.

Plan 2 loan

If you started uni in/after 2012 and are from England or Wales, you’re on a ‘Plan 2’ loan.

With a Plan 2 loan, you won’t start paying it back until you earn £25,725.

When you reach this salary level, your student debt repayments will be 9% of everything you earn above this figure. So, if you earn £26,725, you’ll pay £90 a year off your student debt. If you earn £35,725, you repay £900 a year - or £75 a month.

You’ll probably never pay a Plan 2 loan off in full because of its size and the fact any remaining debt is wiped after 30 years. In fact, it’s predicted that 83% of graduates will never pay their loans in full. The press likes to frame this as a negative thing for students, but in reality, students should take this as further confirmation that overpaying is a bad idea and a waste of money.

Paying off student debt early is usually a waste of money

After leaving university, you’ll occasionally receive a student loan statement from the Student Loans Company. When you look at the amount you borrowed and the interest alongside it, it’s only natural to feel overwhelmed with worry. It’s not unheard of for people to pay off their student loans early due to fears over spiralling debts.

But doing this is unlikely to be a financially wise decision and it could see you wasting money unnecessarily.

This is because although paying off the debt early will reduce your monthly expenses once you’ve got a job over the threshold, those who pay off the debt in full will likely pay far more for their university education than someone who takes out a loan.

When parents pay for their children’s university education… this isn’t a smart move either, even though their intentions are pure.

The anecdote below is from Money Saving Expert. It makes me sad to think just how many parents will have made huge sacrifices to their own lifestyles to help their children through uni, only to discover they’ve wasted money that could have been put to much better use elsewhere.

If you’re looking at going to university soon or you’re a parent with the financial means to pay for your child’s fees, please reconsider spending money you don’t need to. That money could be put to better use in a high interest savings account (though there aren’t many of those around at the time of writing), invested in stocks and shares, poured into a Lifetime ISA, or used to buy a property if you have enough for a deposit already and affordability criteria can be met.

When we think of student finance as a tax rather than a debt, everything changes

Martin Lewis is campaigning to ‘rebrand’ student debt and call it a ‘graduate contribution tax’.

After all, when you compare the amount of money that exits a graduate’s pay cheque each month to the amount that exits a non-graduate’s pay cheque, the difference isn’t that huge. It’s as if the graduate is just paying a higher rate of tax.

Below is a screenshot from The Truth About Student Loans, a segment of the Martin Lewis Show. Martin points out that while a non-graduate earning £25,000 a year will pay 20% tax on their income, a graduate with the same salary will pay 20% tax and 9% back to the student loans company.

So why do the press keep reporting that graduates are crippled by student debt? It makes no sense when you consider that there are much larger living costs that serve as a burden on the average graduate’s finances than student loans.

Don’t blame student loan repayments for a graduate’s inability to buy a house, blame rent!

Don’t blame student loan repayments for a graduate’s reluctance to prioritise retirement, blame rent!

Of course, I’m sure every graduate would prefer the money they spend on student loan repayments to stay in their pockets, but student debt is unlikely to be the sole cause of your financial difficulties. If you’re struggling to get by each month, it’s probably because you have rent (or a mortgage), bills, travel costs, childcare costs, and debts such as credit cards or unsecured loans.

Student loan debt won’t affect your credit rating

People often worry that student loan debt will affect their credit rating and ability to get a mortgage in future. But in reality, this isn’t true. Your credit rating will be just fine.

Student loan debt is unlikely to affect your ability to get a mortgage

Since your credit rating isn’t impacted by student loan debt, your ability to get a mortgage won’t be affected in the same way it would be if you have unpaid credit card debt or payday loans.

As part of their affordability checks, potential lenders will assess all outgoings when determining whether or not to give you the mortgage you need. This includes looking at your student loan debt. However, since your student debt repayments are only 9% of your earnings, this is unlikely to make or break your ability to get a mortgage. If you’re declined a mortgage following an affordability check that reveals high monthly expenses, your student loans are likely to be a drop in the water compared to other living costs.

Our pal Martin adds: “It is not a big issue for getting a mortgage. The biggest issue that young people face for getting a home is primarily building a deposit to get there while they’re renting because renting is too expensive. Tuition fees are a red herring.”

I’ll leave you with more of Martin’s expertise: “With interest rates for those who started uni in or after 2012 as high as 6.3%, some may assume repaying as much as you can is a boon. Yet the stats show the huge majority – over 80% – of these university leavers are unlikely to clear their loan in full in the 30 years before it’s wiped, so that interest rate isn’t what they’ll pay. For those on lower earnings, overpaying some of your loan is often futile as it won’t alter what you repay in future – in which case overpaying is just flushing money down the loo.

“For those who started university before that (or those from Scotland or Northern Ireland since) as both the amount borrowed and the interest rates are lower, you are more likely to clear all the debt before the loan’s wiped.

“But the interest rate is lower – only 1.75% – so if you’ve cash spare to make voluntary payments, there are usually better ways to use it. Clear other debts first, and consider putting extra cash in a savings account to prevent future borrowing. After all, you can earn more there than the interest is costing you – up to 2.6%.”