Student Loans

The UK student loan system for university student works like this:

• Interest
• Tax
• Repayment Calculator
• Effect on take home pay
• Conclusions

Interest

The student borrows money to cover their tution fees and part of their living expenses. The whole sum is borrowed at the start of the course.

Interest is charged for the period of the course at RPI + 3%

RPI is Price Retail Index. This is a measure of inflation that includes mortgages

After the course interest charged as follows:

Earnings below £25,000	RPI
Earnings between £25,000 and £41,000	RPI + a sliding scale between 0% and 3%
Earnings above 41,000	RPI + 3%

Tax

When student begins work, they pay an additional income tax for 30 years or until the loan is repaid through this tax. If the loan has not been repaid after30 years, it is written off.

All income above £25,000 is taxed at 9% regardless of the amount of loan outstanding

Repayment Calculator

This calculator indicates if and when the loan is likely to be repaid

Assumptions

• Salary will increase steadily from starting salary to ending salary
• Salaries are adjusted for inflation
• Debt is adjusted for inflation
• Student tax is adjusted for inflation
• Calculations are done annually

In effect inflation is ignored. This not just simpler, but gives more meaningful values

Annual Tuition Fees		£9250 for 2017/18
Annual Maintenance		£3800 is 46% of maximum and is available to all
Course Years
Starting salary
Ending salary		Salary 30 years after university
End of Course Debt		Initial loan + interest
Year Loan Repaid		The loan is cancelled after 30 years
Total Paid
Final Debt

Effect on take home pay

This table shows how the student icome tax effects take home pay

Conclusions

Before the huge increase in tuition fees from £3465 to £9250, most students could reasonably expect to repay the loan within 30 years although with only a few years to spare. Since the increase, very few student can expect to repay the loan before it is written off. This leads to the following conclusions:

1) Student loans should no longer be thought as a "loans", but rather an additional income tax on students for 30 years. Only those students whose parents can afford the tuition fees and maintenance costs are exempt from this tax.

2) Unlike a normal loan, there is no link between the size of the loan and the tax paid each year. The student tax paid is 9% above £25,000 regardless of the amount of the "loan" so there is no additional cost to borrowing the maximum available.

3) Unlike a normal loan, choosing to reduce the debt by voluntarily making additional payments will not reduce payments in future years until the debt is repaid. Common advice is to put the money towards paying off normal loans or saving for a house deposit instead.

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