Martin Lewis guide to student loans as expert warns statements are ‘misleading’

Martin Lewis guide to student loans as expert warns statements are ‘misleading’


 Beware student loan statements.  They’re dangerous and misleading. I wish I could tell you to rip ’em up without looking at them, but occasionally there’s ­practical info you need  Over 5million uni leavers still have outstanding loans, and many panic on seeing £100s in interest added each month – a ­financial canker that’s led some into making catastrophic decisions  No surprise that one of the most common questions I’m asked by those with a little spare cash is: “Should I be trying to clear my student loan?”   For detailed help see mse me/studentoverpay , but in brief… Which student loan plan do you have? There are three main types   Plan 2: All from England or Wales who started university in or after 2012, including current students   Plan 1: All who started university between 1998 and 2011, and Scottish and Northern Irish students since2012   Mortgage-style loans: All those who started between 1990 and 1997.   Plan 2 loans: These are the ­scariest as the debt can be up to £60,000  The interest is high, too. It changes ­annually with inflation, but for this academic year 5 4% is added while at university; then 2.4%-5.4%, depending on income, when you leave  Yet while this is what statements show, for most these numbers are irrelevant as what you owe (the borrowing plus interest) ISN’T what you pay back  What you repay each year depends solely on what you earn.    You repay 9% of earnings over £25,725 (£26,575 from next April) Earn less and you pay nowt.  In effect it’s like a 9% additional tax, because your annual repayments stay the same whether you owe £50,000 or £3 million  The prime difference the amount owed makes is whether you’ll clear the loan or not within the 30 years before it wipes   It’s estimated by the Institute for Fiscal Studies that 83% WON’T.  Of course those who never earn over the threshold won’t repay owt at all  Those who earn just above it will repay some of their original loan but no interest  Mid- earners may pay the loan and some interest, but less than inflation, so there’s no “real cost”  Mid-to-high-earners may pay real interest, but still not everything on the statement  So for all those groups, the interest you see added to your statement is NOT the interest you pay  The only people for whom statements tell the truth is that top 17% of earners who’ll clear within the 30 years  Tragically, the pressure of seeing that oft-irrelevant interest build-up pushes people to make mistakes  One woman told me she’d used an inheritance of a few thousand to overpay her student loan to “reduce the interest”  Yet she was a low earner, so that overpayment’s unlikely to reduce what she’ll pay in future by even a penny  It’s money flushed down the loo, as you can’t get back what you voluntarily overpay  Therefore those with spare cash should use it first to clear other expensive debt After that, save it to reduce the need for future borrowing.   I’d suggest building up a mortgage deposit – a far better use of the cash (see mse me/LifetimeISAs ).  After all, with other debts they still chase you if you lose your job, but with student loans lower income means you don’t repay  Only those who’ll be consistently high earners over the 30 years, and won’t need to borrow anywhere else, can truly say, “The interest is higher than I can earn saving, so I’ll pay it off”   Plan 1 loans: Here, the logic is different to Plan 2, as you likely borrowed less originally, and you repay MORE each year (9% of everything earned over £18,935)  Therefore you’re far more likely to clear the debt before it wipes.  However, the interest rate here is far cheaper, set at the LOWER of either the rate of inflation, or the Bank of England base rate plus 1% So currently it’s 1.75%.   That’s cheaper than almost all other long-term borrowing, so definitely clear those first  Yet even if you’ve no borrowing now and will never need it, the top fixed savings accounts (see mse me/topsavings) pay more than this loan charges you.   As as long as you trust yourself not to splurge it, most people should just save it there rather than overpay their loan  For more detail on this see my Repay Plan  1 loan video at mse.merepayplan1.   Mortgage-style loans : These are very different Unless you earn over the £32,347 threshold, you can defer and not repay.  If you earn above the threshold you pay in fixed instalments, like a personal loan  However if your loan is still outstanding now, for most it’s unlikely you’ll clear it before it wipes So why overpay?  And even if you do clear it, the interest rate is set at the rate of inflation, so there’s no real cost anyway

Leave a Reply

Your email address will not be published. Required fields are marked *