Things That You Didn’t Know About Student Loans
Thanks to the student loan initiative, millions of students from working-class backgrounds are given the chance to attend university. Many are first-generation alumni, which means that for the most part, it’s a learning curve. At Frugalalot, we’re here to clear up some myths and give you a better insight into managing your student loan finances
Technically, the student loan isn’t a debt
Being over £50,000 in ‘debt’ can be a bit daunting. While it’s an accumulation of tuitions fees, maintenance loans and interest, when you’re fresh out of university and on a humble salary, you wonder how on Earth you’ll ever be able to pay that amount back. But fear not! There’s no real urgency to pay it back. It doesn’t go on your credit file and technically, it’s not a debt. It’s more like a tax. So, there will be no debt collectors banging down your door at 8 am. Phew! That’s a relief.
You only have to start paying it off once you earn a certain salary. This is dependent on when you started university. For example, if you’re on Plan 2, you’ll repay 9% a month once you earn over £27,288. Let’s say your salary is £28,000, you will be £712 over the threshold and will be charged interest on this only, therefore, you’ll be paying back £64,08 a month. I bet that £50,000 doesn’t seem so scary now! Please note, that earnings include any money from employment, self-employment or investments. You can find out what Plan you’re on here.
In essence, the more you earn, the more you repay. Your employer will automatically deduct the repayments from your salary before the money finds its way into your pocket. On top of that, if you can’t pay it off after 30 years then your debt gets cleared. The countdown starts from the April before graduation, so set your alarm!
Overpaying on repayments is common
Overpaying your student loan is a common occurrence since the money automatically deducts from your account and is easy to miss. According to the Guardian, the Student Loans Company (SLC) is holding over £18.3m in overpayments since 2015. Your eyes are watering, not mine! Despite this, there have been numerous feel-good stories where students have been able to recoup hundreds and sometimes thousands of pounds in overpayments.
But why does this happen in the first place? There are several reasons. For example, many students have had money taken out before they’ve even graduated. Daylight robbery, if you ask me! But it’s an honest mistake that is due to an admin error. Another reason is that repayments are taken out before you meet the threshold. This may be because your earnings have varied throughout the year. Lastly, you may have been recorded as being on the wrong repayment plan so ultimately, it wouldn’t hurt to check. If you’re also looking for a tidy pay-out (who wouldn’t be?) then you can inquire by visiting the Student Loans Company website and calling their helpline. A five-minute conversation can make you bank!
Repaying early isn’t a good idea
The government restricted early repayments in the past by dishing out penalties. Fortunately, the idea was reversed but is it actually a good idea to repay early? Usually, you’d encourage people to pay off their debts as soon as possible but as mentioned earlier, this isn’t debt, therefore it’s not such a good idea to jump the gun. The main reason is that your outstanding balance could get wiped off before you even get a chance to completely pay it off. By paying it early or overpaying, you could in fact be tens of thousands worse off. There’s also no harm in waiting since repayments depend on what you earn, rather than what you’ve borrowed, therefore you could repay less than what you owed.
Student loans can affect mortgage eligibility
As if it wasn’t already hard enough! Tuition fees, which can rise to £9,250, can harm your ability to take out a mortgage. But not in the way that you think! Since the student loan isn’t recorded on your credit file, lenders aren’t necessarily put off by the debt factor. Still, by conducting an affordability check, which focuses on your ability to make repayments on the mortgage, the lender will be able to see how much comes out of your account each month and whether this will negatively impact you.
At the end of the day, it’s a catch 22. The lower your income means the lower your student loan repayments will be; however, this will decrease your loan-to-value ratio. The higher your income means the higher your repayments are, which will flag up on the affordability check. Nevertheless, this issue will most likely affect those who started university before 2011, when the tuition fees were capped at £3,000. Even though the borrowings are significantly smaller, the repayments are bigger since on average, they pay 9% on salaries over £19,895.
Grants, bursaries and scholarships are available
Assuming that you haven’t already graduated from university, as a student, you could be entitled to a grant, scholarship, prize or bursary. This is money that you will never have to pay back and is a surefire way to reduce the amount you borrow in tuition and maintenance fees. Every year, the government spends approximately £5 billion on these schemes and initiatives for eligible students.
On the other hand, hundreds of thousands of pounds go unclaimed within the same time since universities don’t bother notifying students. So, whether you’re starting your first year or in the middle of your journey, then it’s worth popping the question. Not to your girlfriend but your university. You could be thousands better off. You can become eligible for these initiatives and schemes for various reasons. For example, if your parents earn less than £25,000 a year, you will be able to receive a grant for living costs. For those with parents than earn less than £50,000, a grant will be given in conjunction with a loan. Be sure to research the criteria regarding your university.
Let us know what you did and didn’t know in the comment section below!
If your need help budgeting as a student then check out our blog. We have loads of ideas for making money online that you can start straight away.