Student Loans, now a 30 year graduate tax!
I stumbled across this BBC article in which some students have taken out student loans and now owe MORE than what they started with DESPITE having started repayments...
in the case above a £44K loan has been transformed into a £54K amount because of the relatively high interest rates over recent years.
One of the loan plans (plan B) charged students the RPI plus 3%, and 7% adds around £3.1K a year in interest, so after just three years, that's £54K to pay back!
The repayment threshold for graduates is £27K, and when your salary hits that then 9% of your salary automatically goes to paying off your student loan.
Any sum remaining after 30 years is written off.
If you had an average lifetime salary of £40K for 30 years then you'd pay 9% of £13K a year (£40K - £27k) which would mean repayments of around £1.1K a year.
The problem with this that even on the better RPI loan deals, if interest is being added onto say a £40K loan at the rate of 3% then that's adding £1200 a year in interest to the loan.
So with an average lifetime salary of £40K you'd never pay the loan off. Although in fairness you'd only pay back pretty much that £40K anyways over the course of your working life!
If you earned £50K then you'd pay around £2K a year, which would mean you'd see a decreasing amount of capital go off your loan, unless the RPI went up to 5% in which case you're facing treading water, with a potential total pay-off of £60K over 30 years, a staggering 50% Interest rate on the original loan of £40k.
Student Loans Final Thoughts
SO if you're earning an average income over 30 years of £40 - £50K which is going to be MOST graduates, there simply aren't that many jobs paying over £50K out there, and even if you did get one you're likely looking at 10 years earning below that, then you'll probably be paying an additional 9% of your income to pay off that loan, which would be perpetual for 30 years assuming a £40K initial loan and RPI of 3% or more!
This is bonkers for middle income earners, on top of income tax and NI another 9% is significant.
It's something to factor in when working out whether a degree is worth it or not, the fact that you'll be paying back MORE potentially!
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I guess many will never pay the full amount. I heard that universities want to put the fees up as they have been fixed for a while. Back in the day I got a grant and owed nothing.
It's a crazy economic situation - I know fees have been frozen for a while and they are not realistic. I'm the same as you, zero fees and only a maintenance grant which totalled about £4K after three years I like, very manageable after!
The new plan drops the repayment threshold further to 25k. It's pretty obscene that most will never pay it off until it's written off
Oh that's mean, reducing it by £2K along with inflation eating into wages, Jesus!
This isn't such a shock. If, for example, the student stayed in school to defer starting payments, the interest would still accrue and the overall debt would continue to grow unchecked. And, if only making minimum payments, the interest growth, especially if variable, would outpace inflows as well. It's a horrible design of indentured debt that only benefits financers and banks.
It is awful I agree - wld really put me off doing a degree!
I did the smart thing and just never declared my income lol. It's been 15 years. 15 more to go!
To be honest from a moral point I agree with myself here. Dumping these massive loans on basically ignorant kids who have literally no idea what a loan or 'interest' even means, crippling them for life as a punishment for being poor... it's just reprehensible to me.
Realistically, I'll probably own up to it when I eventually move back and pay whatever the massive interest rates I've shafted myself with, but it's actually not even gonna be as bad for me as current graduates: My loan was only £9,000 for the entire 3 years. I think I did a calculation once where at this point I might owe something like 15k? I could pretty much pay that off in one lump sum.
Nowadays though, those loans are skyrocketing and like you say, the impact of interest is significantly greater now.
And, the 'write off' period has actually increased to 40 years - basically one's entire life after graduation.
If you're self-employed and living outside the UK I guess that's one way of doing it! The problem is if you have a regular job it just comes straight out!