If you decide to defer your entry to university until 2023, it could cost you £10,000s extra throughout your life
That’s right, tens of thousands of pounds extra. Student finance is making a big change next year (coming into effect in September 2023), so this is the last year you can go to university without being on the new system that requires you to pay far more over your lifetime.
According to calculations, graduates with low to average earnings who start university in 2023 or later will pay back around £30,000 more throughout their lives than graduates under the current system.
Not only this, but you’ll also be paying your loan back for a lot longer – most people who start university in 2023 or later will still be paying off their loans in their 60s. Read on to find out more details!
Who is affected?
The announced changes will affect future students who live in/are from England, regardless of where in the UK they end up studying.
If you live in Scotland or Northern Ireland, these changes won’t affect you because the student finance system is different there. The Welsh Government has not decided on arrangements for 2023, so it’s unsure whether these changes will affect you if you delay entry to university by a year.
What are the main changes?
These are the main changes in England:
- The repayment threshold is being lowered from £27,295 to £25,000, meaning that once your income is above £25,000, you’ll be charged 9% of whatever you earn above this amount. This means you’ll start paying your student loan back sooner, and pay back more, because your income will be higher above the new threshold than it would have been over the old one.
- For example, a graduate on a salary of £30,000 would pay off £450 of their loan each year, while under the current system they would only pay off £243
- The loan repayment period has been extended. Currently, whatever remains of your loan after 30 years doesn’t need to be paid back – it just gets deleted. Under the incoming system, this period is being increased to 40 years, so you’ll be paying back more each year and paying it for longer.
- Note that student loan repayments should be considered as a tax rather than paying off debt. This is because the amount you have left to pay doesn’t go on your credit file like a normal bank loan would.
Your credit file is simply a history, of the loans you’ve taken out and how you’ve managed repayments, that lenders use when deciding whether to lend to you and what interest rate to charge. Having a large unpaid bank loan would usually make lenders less likely to lend to you, but your student loan doesn’t show up on your record so you can’t be discriminated against for having one.
Some good (ish) news: interest on loans from 2023 onwards will rise in line with the Retail Prices Index (RPI – a measure of inflation) rather than RPI + 3% which is the current rate.
Let’s use an example to help this make sense. Say I buy a whole range of products today for a total of £100. Because of inflation, in 10 years’ time if I went to the shops to buy the exact same products, it might cost me £120.
Under the current system, if I originally borrowed £100 to make my purchase, I will have paid back more than £120 by the 10-year mark because my interest payments were greater than the rate of inflation during those 10 years.
Under the new system, I will only have to pay back £120 during that period because, when my interest rate equals the rate of inflation, the amount of money I pay back is no more or less valuable than the amount I originally borrowed.
These new reforms will increase the number of students who will end up paying off their loans in full. Currently, roughly 23% pay off their full loan, whereas under the new system it will be around 52%. Under the current system, the state effectively pays off 44p of your loan for every pound that you pay off. Under the new system, this falls to 19p.
Does anyone benefit?
Anyone who can pay off their loan quickly will benefit from this reform, since they will pay less interest over their repayment period. This means high earners will benefit, while everyone else does not.
As well as your tuition loan, you can also get a maintenance loan to help you pay for your living costs at uni. Unlike the tuition loan, for which you are entitled to the full amount, the size of the maintenance loan you can get depends on your family’s income, so some students get less than others.
For students who get less than the maintenance loan, their parents are expected to give their child the rest each year.
Well, that’s the whole of it. We hope you found this information useful, and we understand that it was probably quite stressful to read for anyone considering taking a gap year.
Our advice would be to still follow your dreams, and if a gap year is part of that dream, then so be it. However, it is also worth looking into moving your plans for a gap year if you can, so that you can register as a student this year to be on the current loans programme – you could potentially do your gap year plans after uni, or during if you have the option to study abroad for a year.
Before you leave, take 5 mins and reflect on what you’ve learnt from this
- What have you learned about the new repayment process?
- Will this impact your decision?
Make a note of these reflections to help you on your journey towards your future.