15 Student Finance myths debunked
We hear a lot about Student Loans and interest rate increases in the media – but what does it actually mean? We debunk some of the most common Student Finance myths...
Student Finance is complicated enough as it is, so it really doesn't help when misinformation is thrown around. In our Student Money Survey this year, we found that half of students don't understand their Student Loan agreement, and over half worry about paying it back.
Arming yourself with the facts when it comes to this stuff is extremely important, and for many young people it can even determine whether or not they go to university at all.
And while we certainly don't agree with many aspects of Student Finance, the situation is often not half as bad as it first seems. This guide will help you separate fact from fiction, and explain how all this Student Finance stuff actually works.
15 misconceptions about Student Finance
Here are the most common myths about Student Finance, with key facts and info to clarify them:
UK student debt is the worst in the world
This is something we see thrown around a lot in the media, but please don't let this scare you.
While tuition fees in England are indeed some of the highest in the world, it's important to remember that how we pay for university here is very different from many other countries (like the US), so it's not really a fair comparison.
Although tuition fees here are high (too high, in our opinion!) you don't have to pay anything up front and Student Loans are funded by the government. As you'll see below, the repayment terms are manageable, won't affect your credit rating and the chances are, you won't end up paying it all off before it's wiped anyway.
In contrast, private Student Loan lenders in the US are notoriously unsympathetic of students' personal circumstances. Six months after graduation, they're already knocking on your door looking for repayments whether you can afford them or not.
While there are private Student Loan lenders in the UK, we'd strongly advise you to consider the alternatives instead to reduce your student debt.
If you pack your bags and head to another country to study, tuition fees might be cheaper – but you won't get the same level of financial support, which means paying more up front.
You need to be wealthy to go to university
While tuition fees are now over £9,000 a year, and you'll need to pay for living costs on top of that, you don't need to pay anything up front. The government will cover your tuition fees with your Tuition Fee Loan, and they'll also give you a Maintenance Loan to cover your living costs.
The lower your household income, the more money you'll receive as a Maintenance Loan, as Student Finance understands that your parents might not be in a position to support you financially while you're at uni.
Although this means that those from lower-income backgrounds graduate with more debt than those from wealthier families (and therefore will accumulate more interest), current repayment terms mean it's unlikely you'll pay off the loan in full before it's cleared in 30 years.
As well as this, there's a whole load of scholarships, bursaries and grants to help you if you're really strapped for cash.
However, many students do report that the Maintenance Loan they receive isn't enough to cover their living costs at uni, and 67% of students have turned to a part-time job at uni to boost their income. There are loads of ways to make money at uni if you're worried you might be low on funds.
More debt means higher monthly repayments
What many don't know is that, although the increase in tuition fees means you'll graduate with more debt, you'll actually pay back less each month than students did previously. This is because how much you repay each month depends on how much you earn, not how much you owe.
If you went to uni after 2012, you currently only repay 9% of anything you earn above £25,725, and the threshold will go up to £26,575 in April 2020. Note that this is NOT 9% of everything you earn, as is sometimes reported.
For students who went to uni before 2012, the threshold is currently £18,935, and it will go up to £19,390 in April 2020.
For example, if you're earning £27,725 (so £2,000 above the £25,725 threshold), you'll repay 9% of that £2,000 (£180) over the course of the year, which works out at just £15 a month.
Obviously, if you're lucky enough to get a high-paid job when you leave uni, you'll repay more. If you're earning £34,725 annually, you'll pay 9% of £9k (the difference between your salary and the £25,725 threshold) which is £810 a year, or £67.50 a month.
You'll be paying off student debt your whole life
No matter how big your student debts are, if they're government loans (this includes the normal Tuition Fee Loan, Maintenance Loan – anything you get through Student Finance basically) and not loans from a private lender, they'll be wiped after 30 years (or 25 years if you went to uni before 2012).
If you go straight into uni from school at 18 and graduate at 21, this would mean your repayments will stop when you're 52 (repayments start the April after graduation), even if you've barely made a dent in repaying them.
Find out how much of your loan you'll have paid off before it gets wiped using this Student Loan repayment calculator.
You should pay off your Student Loan as soon as possible
While the decision of how and when you repay your loans is entirely up to you, we'd strongly advise against trying to repay your loan early.
Repaying early would reduce the amount of interest you pay overall, but in most cases, it's extremely unlikely you'll even get to the point of paying off your accumulated interest at all before the 30 years are up and it gets wiped.
Therefore, if you start trying to pay your loan off quickly, you could end up paying off money that you wouldn't have paid back otherwise.
For those who have serious hopes of becoming a millionaire with a mega salary once you graduate (in which case you'll probably be on track to pay off your loan in full before the 30 years are up) – why not look into investing your cash instead?
If the interest on your loan is growing at a rate of 5.4% (which is the current rate for high earners), you might feel pressured into paying the whole thing off if you know you've got the spare cash. However, a savvy investor could easily get a return of 7%+ on that cash which is definitely something to think about.
For more guidance on how quickly you should repay your loan, check out our guide to understanding your Student Loan repayments.
All universities are allowed to raise tuition fees
Back in 2012 when tuition fees had a big increase, we were all told that only the top unis would be charging £9k. But as we all know, everyone ended up jumping on the bandwagon and charging full whack.
A lot of people worry that a similar thing could happen again, but as things stand, universities are only allowed to increase tuition fees in line with inflation. This is why fees increased from £9,000 a year to £9,250 a year in 2017/18.
In 2019, the Augar Review suggested universities lower tuition fees from £9,250 to £7,500. But, particularly as the review was done while Theresa May was Prime Minister, and there's not been a huge amount of reference to it from the new administration, it's very unclear how much influence the review will actually have on tuition fees.
Bailiffs will come if you don't repay your Student Loan
You'll never be expected to keep up with repayments if you're out of work or working in a job that pays below the £25,725 threshold.
Better still, you won't even be responsible for sorting out the repayments yourself, as they'll be automatically deducted from your salary each month without you having to do a thing (although keep an eye on your payslips to make sure you're not being overcharged or paying it back too early).
This essentially means you'll only ever pay back your Student Loan when you're able to, and there's no way the debt collectors will ever come demanding payments.
The government keeps changing your loan's interest rate
Understanding the interest rate on your loan can be a total headache, and it's extremely common for students to get this bit wrong. A great example of this was when a graduate's letter complaining about the unfair interest on his Student Loan went viral, but as we pointed out, it was factually incorrect.
The maximum interest that the government can charge on student loans is RPI+3%, but RPI naturally goes up and down over time.
Therefore, when you read about Student Loan interest rates going up, that's not because the government's changed them, but because RPI has gone up with inflation.
You can avoid tuition fees by studying outside of England
This one does have some truth to it, but is mostly myth!
Firstly, tuition fees are only free in Scotland for Scottish residents and non-UK nationals from the EU. So if you're an English student looking to escape the £9k+ a year fees, Scotland isn't your answer.
You have to live in Scotland for at least three years prior to applying to university to be eligible for the free fees, and even then your application might be denied if they think you've just moved there for the sole purpose of getting uni for free.
You could get tuition fees much cheaper (or entirely free) by studying somewhere in Europe instead, but Student Finance won't be available to you. You'll have to use your own savings or a part-time job to cover all your living costs while you study.
You start repaying your loan as soon as you graduate
You won't be expected to pay back a penny of your loan until the April following your graduation, at the earliest. Therefore, if you graduated in June 2018, your first payment wouldn't have been taken until April 2019 at the earliest.
This means your first year of post-uni life is payment-free, and even then you'll only start repaying if you land yourself a nice graduate job and are earning above the £25,725 threshold.
Even if you drop out of university, you don't repay until the following April. There's more information on that in our dropout repayment guide.
Your parents have nothing to do with your finances at uni
OK, so whether we agree with this is another question altogether. But it's worth clarifying that the government does expect your parents to be involved in your finances at uni.
The government decides how much Maintenance Loan you should receive based on your household income, because they expect your parents to make up the shortfall.
In fact, our research has found that parents contribute an average of £134.25 a month to plug the gap.
The assumption is that wealthier parents can afford to foot the additional cash to put their child on an equal playing field with those from lower-income households who receive the maximum Maintenance Loan.
In reality, some students will get more financial support from their parents than the government recommends, and some won't receive a penny. The issue here is that, although the government uses household income to decide how much your loan should be, it's only a guideline and not an obligation for parents to cover the shortfall.
Use our parental contribution calculator to find out the extent to which the government expects your folks to supplement your loan, based on your circumstances.
Your student debt will affect your credit score
A lot of students worry about how their credit rating will be affected by having a large chunk of debt, but the good news is that your Student Loan debt won't appear on your credit report, so it won't affect your score at all (phew!).
The only way they'll be able to find out if you have a Student Loan at all is if they ask you as part of the application process, and they'll likely only to do so to calculate your net earnings.
Your Student Loan will stop you from getting a mortgage
Your Student Loan repayments do affect your mortgage application to a small extent, but it's unlikely they'll ever stop you from getting a mortgage altogether.
When applying for a mortgage you'll undergo something called an 'affordability check'. This is where a mortgage lender checks your monthly incomings and outgoings to see how much you'll realistically be able to pay up each month (and decide how much cash to lend you accordingly).
As your loan repayments will be coming out of your salary each month, you'll technically only be able to afford a smaller mortgage repayment each month than if you had no Student Loan repayments to make.
However, the amount you repay is so little in the larger scheme of things (i.e. only 9% of anything you earn over £25,725) that it shouldn't make much of a difference, and certainly shouldn't impact your ability to actually get a mortgage.
You need to pay for master's degrees yourself
Since August 2016, the government has been offering Postgraduate Loans of up to £10,906 for those looking to do a master's degree in the UK.
As master's courses tend to be on the pricey side, many students have previously opted to go to Europe for postgraduate study instead – where it's a lot cheaper, and sometimes absolutely free.
However, it's important to note that the £10,906 loan is intended to cover both your tuition fees AND living expenses, and the tuition fees for most Master's courses sit at around £9,000 – £11,000. This means that the loan will likely only cover your tuition fees, and you'll have to find the money to cover your living expenses elsewhere.
As of 2018, the government has introduced Student Loans for PhDs as well. They'll give you up to £25,700 to cover the entire course.
You don't repay your Student Loan if you move abroad
As much as we'd love this one to be true, it is certainly a myth that you don't have to keep repaying your Student Loan if you move abroad.
No matter where in the world you're living, if you're earning over the equivalent of £25,725, you should be making Student Loan repayments.
The annoying thing is that you have to take the initiative of contacting Student Finance yourself to let them know you're working abroad and set up your repayments – it won't happen automatically as it does in the UK.
If you don't repay the amount you should, you'll be expected to pay the backlog of months you've missed (sometimes as a lump sum!) when you return to the UK, so it won't work as a trick to defer payments either.
Looking for more essential info on your finances? Head over to our guide on the vital money lessons you should have been taught in school.