Student Loans Explained - BOD023

0:00Pete:So you graduate in July? Yeah. July. Dad says July really weirdly. I don't think I do. It's actually quite unusual to have both of my parents gone to uni. Yeah. Do I count? I went for two years. They were the second. But scraped the first. Oh yeah. Let's not call it, oh, you know, a glaring success. Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad Pete. Hello. And we're here to teach you the money lessons we were never taught at school. there's no judgment no jargon just real talk about how to handle your money yep here we are again here we are all of half an hour after recording the last one yeah half an hour is probably quite generous to be honest it means though that I can't ask you for a house update because literally nothing will have happened nothing's changed between sort of 8pm when we finish the last one or 8.15pm yeah it's now 8.35pm I am vlogging it though oh okay and also what we're going to do with the footage okay good so you're not but i am vlogging the post the process the process okay good yeah i'm not putting stuff out yet honestly i'm just so scared of jinxing it yeah i understand that we can do it after you know when it's all done yeah i mean i'm kind of recording it in the form of it being like in within my head it being a long form okay because in my head i'm also thinking we're going to do like a breakdown of the process on here like a sit down chat through yeah and we can um you know pull the clips in potentially yeah potentially it's just me seeing to camera a lot of it yeah that's all right yeah we'll see i wish i'd got clips of like me i have one clip of the inside of the living room but like me looking in the house i'll have to film some fake b-roll when i get in i'm sure it's not the first time somebody online has done fake b-roll no definitely not see something for the first time what a surprise it's when they like the camera's inside at the place and then they have to go out the door shut the door open the door and then go wow yeah as if they didn't just set out the camera and yet we heat it up we do yeah we never think about it that's good to suspend your disbelief exactly anyway we're talking about this week today we are talking about student loans student finance Yeah, it's good.

2:15Pete:Big subject. Big subject. And like the ideal for the desired age. Yes. Whether you're of the age to be requiring it or your children are or grandchildren. Or you're starting to pay off. Or you're starting to pay off. Yeah. And I think this is one of the most commonly asked questions I had. Oh, in school and when it kind of, yeah. It's kind of what prompted me to realize how luck, it's kind of what made me realize how i was taking for granted how much knowledge you just had and i had access to that yeah i mean for me real eye-opener was when we started looking at universities obviously for your older sister ellie yeah and sitting in a few student finance presentations on like open days and stuff and just how bad it was and how badly dealt with it was and badly explained really oh yeah yeah i got a story i'm sure we'll get to it in a minute because i didn't get into any to do any of those talks because why the world exploded and covid that was the explosion kind of yeah kiboshed your university aspirations yeah i did uh online open day so i get a feel for bath city so i'm in my bedroom like no get a feel for your lecturers and it's a pre-recorded video and you're like this is this is great yeah didn't go to uni funny times anyway so before we get into student finance we need to talk about wanky word of the week

3:46yes there it is i do enjoy that jingle i enjoy hearing it um so what is this week

3:54Pete:is repayment threshold yes so we do try and keep these somewhat linked to the subject of the episode and suitably wanky of course repayment threshold um so threshold is you know that little bit wood at the bottom of door that you have to step over that's the actual meaning of the word threshold carried over the threshold yeah right so the threshold is the is basically the transition from one room to the next in this case obviously we generally expand that to mean any kind of sort of scale yeah any kind of scale any kind of level that you move past right yeah and when it comes to student loans, the repayment threshold is the level of earnings that once you move past that, see, that's when you start repaying them.

4:39So it's quite logical. So we'll get

4:41Pete:to that in just a sec. Yeah. Big old subject this, but we'll try and keep it succinct. Yeah. Famous last words, that. Do you remember when we started this, we said, well, definitely try and keep them to 20 minutes. I don't even know why we thought that. No, I know. Our introductions are like, well, we're already five minutes in and we haven't started the main body yet. Okay, let's crack on. Yeah, let's. Student finance. The first topic, very broadly, is understanding. So let's get a bit of an understanding of it. Because I feel like there's a lot of... I feel like most people kind of know it, but don't fully know it.

5:13Pete:Well, yeah, they'll know some stuff and not all of it. Yeah. All right, so, Pete. Yes, Kate. Father. What is it? What is student finance? Okay, so it's a system for providing the money for you as a student to pay for your tuition in higher education, so degree level and beyond, and also some money for you to live while you do so. Yes. I mean, bear in mind, so I'm 51, right? So I went to, it was well old. I went to university in 1994. It's, you know, my degree was free. I had no tuition. What? Well, people just didn't get grants. So the government gave you money. You didn't get grants, surely. I did get a grant.

6:00Pete:I didn't pay anything. For scraping your O-levels, you got a grant. A-levels, thank you. A-levels. I did. I got a grant to do an electronics degree, which I failed. And so... And the government changed the system. It's a shock. Why? I know, right? It's my fault. No, but why did you get... Okay, I mean this with all the love in the world. Why did you get a grant? Everybody got a grant. So if you wanted to go to higher education, as long as you got the grades, you could apply for a grant from the government and everybody got it, right? Even though you didn't get the grades? Yeah, there wasn't such a thing as maintenance.

6:30Pete:actually was there. Maybe I did get a maintenance grant. I can't remember to be honest. This is a long time ago. But there was no sort of explicit tuition fees. The sort of universities, I think, were funded by government. That's great. I know. I mean, I really wish it was the case now. Yeah. And yet some bright spark somewhere had the idea of making money off students, which I think is a travesty. You know, the demographic largely known for having money. For having loads of money to spend, right? So the student finance, the system as it is, just provides finance for you to do a degree or a master's degree or a PhD.

7:07Pete:So it's complicated though, which we'll get to in just a second. But they're not loans in the conventional. Because that was my next question. How do they differ from normal loans? So it's worth mentioning actually, the system's changed a lot in the last two or three years. And there are also differences between England, North Island, Scotland and Wales, which is super helpful. Yeah. I have like the ultimate link for people this week. All right. Okay. Because I think still the best resource bar none on anything to student loans is money saving expert.com. Martin Lewis is the founder of that. And I think he's probably done more than anybody else to improve the financial health of the UK.

7:47Pete:So ordinary people in the UK and his pages on the student loan system are incredibly well done. Very succinct. Loads of calculators and stuff to help you. so we'll make sure there's a link to the student loan pages on Money Saving Expert. But a student loan is different to a normal loan, mostly because how interest is charged. On a normal loan, you start paying it back straight away. You do not do that with a student loan. And unlike a normal loan, they are wiped out after 30 or 40 years. It's a very long time indeed. Well, yeah, but... You know, but you don't get that in a normal loan. Yeah, no, it's not just like suddenly we can just not care about it anymore.

8:32It's definitely...

8:32Pete:You know, it's more of a future tax than a loan in the sort of classic sense. So how much debt am I likely to graduate with? Is there a set figure? It's not a set figure. So tuition, I think, is 9 ,250 still. You know, that's per year. Per year, yeah. Yeah, right. so obviously it depends if you do a three-year course or a four-year course i think it's 9 250 might have gone up a bit um should probably research now yeah probably um a maintenance loan i do have some figures that for that um but it all that depends on your household income how much you can borrow and it also depends whether you stay at home and study depends whether you're in london or not so to answer your question how much i mean the sort of figure that tends to get bandied around is around£60 ,000, which is a bonkers number.

9:23Yeah, it is, really. Because it's more than the deposit of my house.

9:26Pete:Way more. Yeah. No. Okay. It's more. Way more. Anyway. Anyway, so, right, that's kind of the understanding, the bog standard basic understanding. Let's talk about how, what you can get. So, what is the difference between tuition and maintenance loan? You've mentioned them both so far. Yeah, tuition loans paid directly to your institution. to the university that you're studying with. So you never see that? You never see it. It doesn't come in your bank account and then you have to pay it to the uni or anything like that. You go straight from the government to the university. Okay, so obviously you have to be there.

9:57Pete:You have to be enrolled. Yeah. Then you have to apply for it. You just have to apply, I think, before May in the year before you go to uni in September, October. Tuition is paid straight to the university. The maintenance loans are paid to you. It's usually paid each term. So you apply for it and they say, yes, we'll give it to you for this year. and they give you the dates when it will land in your bank account. Yeah, so tuition loan, you don't see. It goes straight to the university itself. Maintenance loan, you get regularly throughout the year. Throughout the term. Three terms, usually. Yeah.

10:32Pete:So you get one payment at the start of each term. Yeah, that makes sense. Okay, so how much maintenance loan will I get? This is the variable bit. Yeah. So firstly, there's a sort of maximum figure. So the maximum figure that you can get is 12 ,345, which is quite a nice number. It's a lot of money. Oh, yeah. Right, that's the maximum you can get if you are studying while you are living, studying and living away from home. If you're living away from home and studying in London, where cost of living is higher, then that maximum figure is 15 ,415. That's actually mad that that was more than my wage, it's a TA.

11:07Pete:Yeah, right. If you're studying and living at home, you can still get a maintenance loan. Right? Is that to like cover the costs of like living away or because it, as in the commuting or because they think you're not going to have time to get a job? Yeah. That, right. Basically on both counts. Yeah. You know, it's to support you so that you don't have to work, although you would probably a lot of people still would. And that figure is 10 ,757. So if you're studying the money at home. It's still a hard figure. Yeah, it's a lot more than it used to be, but you know, inflation, right? Life's got more expensive, yeah.

11:38Pete:So that's the maximum. Yeah. But most people won't get that. Because of parental income or caregivers' income. Household income, really important, right? So household, it includes, so let's say, you know, you're living with your mum and her partner. They're not married. They're not your stepdad. But it would still count? Yes. Even if that, like, let's say your stepdad's a waste of space. He doesn't contribute anything to you. Let's just say. Let's just say, yeah, the fact that his income would be taken into account. That's annoying. what about if in my case let's say i went to uni now okay there's no not now a year ago my would ellie's income my sister's income no why because she's sibling so basically it's parents and parental figures caregivers yes grandparents if you live with your grandparent i guess household income yeah i believe so yeah so you know the the problem is so it i can't remember the exact formula but if household income is above 25 000 pounds which is not a high figure then you won't get the full amount it's kind of tapered off and i think the most it can drop down to is half the maximum right now 25 grand is basically minimum wage yeah for more for one person right so the threshold hasn't increased since 2008.

13:07What?

13:08Pete:Madness. So now, because, like, you're right, it is barely been a minimum wage, but surely nobody's getting the full amount, or very few. Very few people. Because otherwise, that's just baffled me, actually. Yeah, it's... Why is nobody shouting about that? I guess some people are, but it's one of many battles to fight, but it's a textbook example of things not keeping up with inflation. You know, it's a household. So most people don't get anywhere near the full maintenance loan. You know, those are the kind of figures, but you will have to apply for the maintenance loan. You'll have to submit proof of household income and go from there.

13:49Yeah. Paying it back. Okay, so when do I start? Because you said I don't pay it during uni. When do I start repaying it?

13:55Pete:Technically, you can start it from the April after you finish your course. So let's say you graduate in July. Yeah, July. that says july really weirdly and he doesn't i don't think i do but both of my girls take the mick out of me so yes let's say you graduate in july july then july you can can start paying it from the following april but it depends on your income which is quite important so okay explain that to me monthly what my what's it looking like i'm gonna get what is it looking like i'm gonna have to repay because in our payslip episode you said it might say student loan on there how much is it going to be student loan deduction so this is the main way that one of two main ways that student loans don't resemble normal loans yes because normally on a normal loan you borrow a set amount over a set period of time and they do the mass apply the interest and you get a fixed monthly repayment and you start paying it the month after you borrow basically right student loans don't behave like that at all so basically there's a threshold and on the newest loans in England, they're called Plan 5 loans.

15:02Pete:So as soon as your income after you've graduated goes above£25 ,000, your gross income, then you pay 9 % on whatever's over that. So if I earned£25 ,500 in a year, So let's call it£26 ,000, so exactly£1 ,000 over the threshold. I would pay. 9 % just on that 1 ,000, not on the whole lot. Yeah. Really important. Yeah. So you pay 90 quid a year, divide that by 12 to work out how much you pay each month. So it's, that doesn't sound like a lot, 90 quid a year. No. But the point is it doesn't matter how much you've borrowed. That doesn't resemble a normal loan either, does it? No, that's true. So you could owe, you know, in some bizarro world.

15:46You could have done a PhD and you've done, and you've got like 90.

15:49Pete:You've got 100 grand worth of student debt, say. It doesn't matter. You'd still pay 90 quid a year if you're earning so 26 ,000. Yeah. right which hopefully after you've got a phd you're earning more than that flip me else what's the point yeah right so yeah you know student debt is a funny thing but that's that's the thing to remember so that's what i mean by it's like a graduate tax because it's a percentage on your earnings over the threshold regardless of how much you've borrowed in which it's not how a normal loan would behave that's right so i said like the most recent ones were plan five loans yeah they've been around for a couple of years, for at least a decade prior to that, the loan system was called Plan 2.

16:32What happened to 3 and 4?

16:33Pete:Not a clue, right? That's stupid. It's the same moronic logic that applies to so much in finance and in government. I don't even know if that was a thing or not. But anyway, I mean, like your sister had Plan 2 loans. Right. So with Plan 2, the threshold is higher. It's 27 ,295. Why? Because it is. great plan five is a new system and then which is worse than plan two yeah in some ways and if you think about that the threshold at which you start repaying is lower so you're more likely to pay on a plan five a more recent loan yeah right so for plan two which many listeners will have it's 27 295 so nine percent on anything you earn above that yeah all right so let's say i've been working a job and i've been paying you know i've won 26 grand or 27 grand whatever and i've been paying my little bit each month.

17:25Pete:Yep. And then I changed jobs and I dropped to 24 grand. Yeah, good question. Payments stop. Okay. So that threshold stays the same. It's another thing that's stupid because your earnings should rise, right? I think the threshold should rise as well. Oh, I see. Because otherwise I mean he's paying more and more and more. Well, yeah. He should pay a raise. And more people will, you know, we've said like 25 grand, plan five, you know, 25 grand threshold, that's barely minimum wage. So pretty much everybody's going to be paying something back. Yeah. Right? so if let's say you even if you just take a career break to go travelling or you take time off work to have a child and your income drops or whatever if you or even you know you take out a break to retrain or whatever if your income falls below the threshold your payments stop immediately yes oh that's good because it's all your repayments are taken through the PAYE system through the tax system yeah so it's very PAYE pays you in yeah which is very clear then they'll be like oh she ain't earning in.

18:23Pete:It just, it's like your tax. It's like the systems work it out. So you know, when we were talking about me buying a house, credit score is a major thing and debts obviously negatively impact that. Does student loan debt negatively impact my score? Not in any way at all. Students that don't go on your credit record, they don't affect your credit score. Why? Because they're not proper loans. I mean, that's a good thing. I think so. But why? Yeah, just because they're not proper loans. It's a completely separate system. That is good, really. Yeah, it seems to make sense to me. Because, you know. One of the things that are more logical about it all.

18:55Yeah. And at 18, I feel like you don't really realise the amount of debt you're taking on. So I don't feel like it should act like a debt.

19:03Pete:No, I agree. Do you know what I mean by that? And it isn't. Yeah, I do. I think it would be ridiculous. You know, in any other scenario, you say, what we're going to do is we're going to talk a load of 18-year-olds into a process where they end up with 60 grand worth of debt over 40 years. Nobody would say that's a good idea. in any other conventional sense nobody would say that's a good idea but in the student loan system it's not really a loan essentially so it doesn't affect your credit score at all however however the one thing that when working out my mortgage obviously you have to work out your monthly payments yes affordability is a big deal and if you can afford it now does student loan impact that?

19:40Pete:well only insofar as it I mean yes insofar as it reduces your net income so if you are earning say a 35 grand salary and have student loans and your mate over here in the next cubicle is earning the same salary as you but has no student loans they are taking on more than you so technically they can afford more each month so their affordability will be better in the eyes of a mortgage and so they are likely to be able to borrow slightly more than you are so it's only an affordability thing it's not a credit thing yeah that makes sense Okay, so let's just rounding that off now with how much I'm personally going to pay.

20:18So, will I ever pay it off?

20:22Pete:There's actually no way to know that. And it's arguably one of the most frustrating and maddening things about it. Because, so, let's take plan five, the newest loans. you're going to start paying them back when you graduate as long as you're earning more than$25 ,000 a year. But I mean, at that rate, you're going to be paying a pittance. You don't graduate with 60 grand worth of debt. You're paying 90 quid a year. You're going to be paying off for a millennium. Yeah. Right? And so, of course, you're not. It gets wiped out after 40 years. But the question is, how much are you going to pay off in those 40 years?

21:00Pete:The biggest variable is your earnings. Sure. Because we don't know what that's going to be. So if you are graduating as a, I don't know, a doctor or a physicist or something, and you're going to end up in a very high-paying specialist job, chances are you probably would pay it all off. Yeah. Because your earnings are likely going to start higher and rise quicker. If, you know, you end up with a degree, which doesn't necessarily guarantee you a high-paying income, you've had a great time at uni or whatever, but you've graduated with a degree in, I don't know, origami or something. You know there's a university in the UK that does David Beckham studies?

21:35Pete:Please don't do that for a degree. Me? Do you think I would do Beckham studies? No, the listeners. Don't do that. It makes no sense at all. Because remember we talked about good and bad debt and I kind of lumped student loans into good debt because the kind of logic is per our definition of something that's low interest and increases in value, your earnings power should be increased by having a degree. But a lot depends on what degree you get. and what your vocation is and what job you end up doing. So whether you're paying it or back or not really comes down to starting salary and salary trajectory, whether it's going to rise and at what pace over time.

22:14Pete:And so there's no way to know. Just as a little question I've thought of in the moment, on one of our Q &A sessions, we had a gentleman asking about helping his daughters pay off their student loans. Oh, yeah. And it's hard to summarise that question because there was quite a lot of detail to it, the difference of daughters and earning power and everything. But I think it's worth mentioning that, yes, it's important to pay your student loans when you can. You have to, yeah. Well, yeah, I know. But if you had the choice between overpaying your student loans and saving in an ISA... Yeah, I wouldn't overpay a student loan.

22:52Do you see what I'm trying to lead you to here?

22:54Pete:And actually, it's a good segue into the story that I said I might mention. So I was in a student finance presentation. Actually, it was at Exeter Uni Penrin where Ellie ended up going. And I came out of this presentation and I walked past a guy and his wife and their daughter. And they were obviously like monumentally freaked out by how badly explained it had been for a start. And interest rates, which we'll get to in a minute. and the upshot of the conversation that I overheard was, well, that's a ridiculously high rate of interest. What we ought to do instead is borrow on our mortgage at a much lower rate of interest and pay for it that way.