University Fees

Many people will have children or grandchildren who are planning to go to university shortly and we regularly have conversations with clients regarding university fees particularly with ‘first-timers’. It really can be a bit perplexing not least the question as to whether the student should maximise available loans and if and when repayments will become due.

From 2017/18, universities in England, Northern Ireland and Scotland are able to charge up to £9,250 p.a. for tuition (£9,000 p.a. in Wales) which is usually funded by way of a student loan. On top of this a maintenance loan may be applied for of between £3,928 and a maximum of £8,430 p.a. if the student is living away from home outside London (up to £11,002 if living in London). This is means-tested and dependent on household income. Assuming the minimum maintenance loan is taken, the debt accumulated in year 1 of study would be over £13,000 p.a. for most students

Since 2012, interest has been charged at an eye-popping rate of 3% above inflation which means 6.1% p.a. for the next year as the rate is fixed to the March 2017 3.1% inflation figure. Repayments are made at a rate of 9% above £21,000 earnings and therefore it is important to realise that outstanding loans are repayable as an additional tax on income and are not treated as a debt as such (although referred in this text as such). They cannot, for example, be taken into account when applying for a mortgage or other finance and anyone earning less than £21,000 p.a. pays nothing.

Let’s take an example of a student who, having graduated from university, secures employment with a starting salary of £25,000 p.a. and student ‘debt’ of £40,000:-

Extrapolated to the end of year 10, the debt would amount to over £67,000. You will note that, in this simple example, the pattern is set. The outstanding loan and interest out run the capital repayments which of course does not allow for future fluctuations in either inflation or salary. Ad hoc capital repayments other than total debt repayment would be futile in this example. Every case, however, would need to assessed individually although it would be take significant salary increases as a career progressed and perhaps a reduction in inflation (not presently on the horizon) for the trend to be reversed.

The double whammy of higher tuition fees and interest rates currently chargeable compared with earlier periods means that many students reliant on the loan system will also be dependent on the 30 year clock to tick round when the State will clear the debt once and for all.