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Student loan changes: the increasing cost of university in the UK

June 16, 2022

Around 1.5 million students in England each year apply for a student loan. That amounts to a whopping £20 billion per year. Yikes!

Up to now only 25% of current full-time undergraduates who took a loan manage to repay it in full.

Recent government changes mean that this number is likely to increase to more than 50% for those students who start university from 2023/24.

This is because while any outstanding student loan was previously written off after 30 years, the changes see that number increasing to 40 years.

Yes, some people will be paying off student loans in their 60s…

Why it’s important to talk about student loans?

Doctor? Michelin Star Chef? Vet? Footballer? Youtuber?

As parents we can't predict what our children will be when they grow up. But something we can do today is try and anticipate what they’ll need to get there.

If your kid’s thinking of being an Architect, Nurse, Engineer or Vet, chances are they’ll probably need to go to university.

And that comes with a cost.

The earlier you start thinking ahead, the better you can plan for your kids' future.

So whether they choose to go to university or not, is really up to them.

But if they do, then you can help them in start adulting without a large amount of debt looming over their shoulders for over 40 years.

How much does it cost to study in the UK?

The student loan system was put in place to give everyone the opportunity to attend university.

What started off as £1,000 tuition fees in 1998 has now risen to £9,250 per year.

When coupled with maintenance loans, a necessity for most when living away from home for the first time, this leads to your average graduate leaving university with £45,000 debt on average (assuming a three year undergraduate degree).

Back in 2012, the same student would have walked away with a debt around £16,000 (seems we had it better than we thought!).

And these amounts do not cover all of a student’s living expenses.

Rent alone will cost a student £418 every month around the UK.

But when we look at London, the average student will be paying up around £1000, if not more. Eeek!

To help with these costs students can apply for maintenance loans from the government. The amounts they can apply for depends on where they live and who they live with:

Maintenance Loans for England (as this is the most expensive)

While these maintenance loans help, a lot of students also have to rely on other sources of income to get through uni, and in some cases more than one additional source of income.

Source: Finder (2021)

How much debt are today’s students graduating with?

Perhaps your kid wants to help others by becoming a Nurse.

Or maybe they're passionate about understanding systems and building things.

Hey there, future Engineer! Numbers, numbers, and more numbers. Maths comes easily to them. And you would swear it's their second nature.

Well, whatever the case, if your child is going to uni, they’ll need at least to take an undergraduate degree which usually last for 3 years.

After those 3 years of studying, your child could be facing a student loan debt of £46,776.

Those that studied in London could graduate with a debt of £55,520.

Ughhh what a big number!

Well that’s the amount of debt if they graduate today.

But if you’re reading this, your kids are probably younger and not quite at uni age yet. Even if we assume fees remain capped at £9,250, the maintenance loan required to live is likely to increase year on year with inflation.

So based off that, if your child was born today then they could graduate with £58,842 in student loan debt if they study outside London or £72,954 if they study in the Capital.

And that’s just for an undergraduate degree! If you assume a longer degree (e.g. to become a Vet), the student loan required starts looking scarily like a US education.

So let’s have a look at today’s price tag for three different professions and what their debt looks like today and a bit down the line.

(Chart above shows studying in UK, not in London and assumes maintenance loan growth of 2.5% per year and interest of RPI @ 2% + 3% whilst studying as government charges interest after completing first year of study for current graduates).


Let’s take an example.

A child born today who wants to study to be a vet could be looking at a debt of £88,406 on graduation day or £112,820 if they chose to study in London.

For our future Architects they could be looking at a debt of £120,300 on graduation day or £155,833 if they chose to study in London (and we thought America was bad for higher education!).

(this assumes RPI of 2% plus 3% interest charge whilst studying)

So what can you do to help them?

Now it’s not all doom and gloom. If you plan early and if you can afford to set money aside for your little one’s future, then the amount of debt they end up with at graduation can be completely removed or at least not as high.

Below we have put together a table showing how much you would need to tuck away if your little one was to attend university in 18 years time.

This assumes that you save/invest this amount each month and it grows at 5% each year over the course of 18 years. Of course, as with all investing the money is at risk and could go down as well as up.

What is the current student loan interest rate?

As we mentioned earlier, fees are currently capped until 2025.

But the RPI applied to the loans unfortunately isn’t. The what?

The Retail Price Index (”RPI”) is the measure of inflation that the government uses to calculate the interest on student loans. To sum it up, they track the cost of living in the UK and whatever that number is then that's the RPI.

Source: ONS (2022)

Now whilst at uni and up until the April after they leave their course, students are charged RPI plus 3%.

Once a student’s income is over the threshold amount for their repayment plan (note that these vary across different uni fee plan cohorts) their interest will rise depending on their salary.

Let’s look at some real life examples.

1) Matt earns under £27,295 a year. His interest rate will be the same as the RPI.

2) Amy earns over £49,130 a year. Her interest rate will be the RPI + 3%.

3) Kenisha earns over 5 years earns between £27,296 to £49,130. Her interest will rise bit by bit from RPI to RPI + 3%.

As you see as soon as you’re a graduate moves up in their career, the higher interest they will be charged on their loan.

Just remember though that the amount of interest your kid will be charged doesn’t affect how much they’ll repay each month or year.

A bit confused? Let’s give you a simple example.

Today’s students begin to repay their loans at a rate of 9% of everything they earn above the threshold of £27,295 each year (i.e. £2,274 a month).

Let’s say Kenisha has a student loan and interest of £20,000 and their salary is £37,295.

They’ll pay 9% of everything they earn above £27,295, so  and their annual repayment is £900.

Luke instead has a student loan and interest of £50,000 and their salary is the same £37,295.

Same as Kenisha, Luke will pay 9% of everything they earn above £27,295 and their annual repayment is still £900.

See? No difference on how much they’ll repay each month, but because Luke has a bigger loan they will be charged more interest than Kenisha who has a smaller loan.


How many people repay their student loan?


In the past, students have not been paying off their loans. Only around 991,500 graduates have fully paid back their student loans vs 5.3 million people who have outstanding debt.  

But the recent changes (the extension of the repayment length to 40 years) will mean that your child will be stuck with the debt for longer. Now it still won’t affect your child’s credit score, but it can definitely impact their chances of getting their first home.

Why?

Because every lender carries out an affordability assessment which will look into recurring payments to decide how much they'll allow someone to borrow.

To put it simply, they want to ensure the person they borrow to can stay on top of your monthly payments.

So whether you want to help your kid to cover a portion of their uni fees or help them with their living costs, now is the best time to start building their nest egg.

Just by setting aside small amounts of money every month for the next 5, 10 or 18 years could help free them of stressing over making ends meet every month. They’ll also be able to focus more on their studies and enjoy those first years of freedom.

Plus, this means once they enter the workforce they’ll have a better chance of securing a mortgage in their 20s and 30s instead of their 40s.

Wouldn’t that be nice?


Don’t forget, when you invest, your money is at risk. You might end up with more than you put in - or you might end up with less. And remember that what you’re taxed depends on your own personal situation, and that can change in the future.

This blog isn’t our advice, so please don’t change your plans or buy or sell any of your investments based on it. We don’t know your money situation, your plans for the future or how much experience you’ve got. If you’re unsure you should speak to a professional financial advisor.