University Fees and How to Repay Them
Written by Amy MacKinnon.
In light of the recent landmark review* commissioned by the government regarding tuition fees, we have produced a short guide to how they currently work, as well as some assumptions on the amounts that could be paid back over a graduate’s employed future.
Currently, universities can charge up to a maximum of £9,250 per annum which Student Finance will cover in full. In addition to this, students can also receive a maintenance loan of up to a maximum of £11,354. This totals £61,812 for a three-year course, which after interest is £66,407 (Assuming RPI at 2.5% plus an additional 3% charge).
At the moment, graduates do not start paying their loan back until they earn over the threshold of £25,725, however, please note that the loan will be increasing by RPI even though payments are not yet being made. Once a graduate is earning over the threshold, they will pay back 9% on the additional amount, if the loan is not paid back within 30 years from graduation the loan is wiped clean and no further payments are to be made. Please note the loan increase depends on the amount the graduate is earning, and the loan increase up to a maximum of RPI + 3%.
The proposal is that the maximum loan will reduce to £7,500 per annum, however, graduates will start paying their loan back at a lower threshold of £23,000. In addition to the lower threshold the loan will be payable for 40 years. Although this could be interpreted as a positive change, if you are looking to pay for university by way of a loan you may be mistaken. This is due to the decrease in the threshold that the loan is payable from and the increase in the term of the loan.
Sally went to University and took out the maximum student loan in full, however, she didn’t take out a maintenance loan. The below compares the two schemes:
|Income||Current Student Loan||Proposed Student Loan|
|Total borrowed after interest||£29,813||£24,173|
|Years Loan paid back for||30||40|
|Total Paid back||£40,703||£51,390|
|Loan value at end of term||£36,817||Nil|
|Difference between loan and amount paid||£12,953||£28,890|
Under the current scheme when Sally’s loan is written off in 30 years it is valued at £36,817, therefore she has not paid back her loan in full. Whereas under the proposed scheme Sally has paid back her loan in full after 32 years, but she has paid £10,687 more than under the current scheme.
As we are unaware of whether the proposed changes are to go ahead, we will assume that the student loan stays as is. Therefore, if we look at the above example Sally would pay back £40,703 in total, £12,953 more than the loan she initially borrowed.
If Sally’s family invested £87 per month from when Sally was born and this achieved growth of 4% per annum there would be a fund of £27,751 available for Sally to use to fund her university. Saving her a total of £12,953.
This could be achieved by investing in several investment vehicles, however, the most tax efficient vehicle would be an Individual Savings Account (ISA), no tax is paid within the investment and funds can be withdrawn at any time tax free. A member of Sally’s family could invest in an ISA and then gift the money to Sally as and when she needed it. Alternatively, Sally’s family could invest the money into a Junior ISA in Sally’s name, however, this will automatically become Sally’s at the age of 18 and nobody would be able to control how she spends the money.
It should be noted that the full Junior ISA allowance is £4,368 for the tax year 2019/20 if this amount was invested each year for 18 years and attracted growth of 4%, the fund would be projected to be £116,500.
by Amy MacKinnon
If you want advice for saving for university and your family’s future security get in touch with us today at firstname.lastname@example.org or call 01992 500 261 now and see how we can help address your financial future.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.
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