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Martin's guide to student loan changes

Student finance is always a hot potato, and with the news last week that student grants are to be scrapped, and a retrospective hike in student loan repayments, many students, future students, graduates and their parents are worried. So here’s our Money Saving Expert, Martin Lewis to explain what it really means and who’s effected.

Q. Before we start on the changes, just remind us the basics of how student finance works?

When you go to university, if you’re a first time UK undergraduate you don’t need to pay upfront. The Student Loans Company pays your tuition fees for you and gives you money for living. Then in most cases when you leave you repay this, but only if you earn enough – at 9% of everything above £21,000 – for thirty years then even if you haven’t repaid a penny, it’s wiped.

It’s a bit like an extra tax – though what you repay only depends on what you earn – in many ways financially, it’s a no win, no fee education. For full help on this see Martin’s ‘Full 20 student loan mythbusting guide’.

I’m going to use examples for English students studying in England, for people from or going to uni elsewhere in the UK the amount you borrow tends to be less but the principles are similar.

Q. So what’s happening to student grants?

Until now, for students from lower income families, roughly below £43,000 income, up to £3,400 of their loan for living was replaced with a non-repayable grant. From September 2016 that’s being scrapped. Yet there’s much confusion about this. There are two big things to note:

1) This only applies for new starters. Those already at university and getting grants will keep getting them.

2) This doesn’t mean they’ll have less money coming in. New 2016 starters will get a bigger loan to replace what they would’ve got in grants. And in fact the loan figures have been upped. This is useful as often the big issue that hits students isn’t the size of the loan, it’s that they don’t have enough money day to day to live on, often student rents alone eat up much of this.

Q. Isn’t this likely to really hit poor students?

In many ways the big problem is the confusion and the psychological deterrent not the practical finances. For most students it makes no practical difference. The replacement of a grant with a loan will ONLY cost more for those who leave university and have long-term very high earnings.

That’s because if you compare the current and new system, the fact it’s a loan and not a grant would only cost you more, if you’d repay your entire tuition fee, remaining maintenance loan after the grant, and interest within the thirty years before the debt wipes anyway.

Most students won’t, so there’s no cost to them. My calculations estimate only those on STARTING salaries of £30,000 and up, and then above inflation pay rises would actually pay more.

Q. What about this retrospective hike to student repayments?

For me this is actually the big one. Though it’s received little publicity – as it doesn’t immediately seem such a big problem. I need to declare I’m actively campaigning on it – I’ve writtenan open letter to the Prime Minister and have hired lawyers to see if it can be challenged. As I explained earlier, since 2012, graduates only repay 9% of what they earn over £21,000, and this threshold was due to rise from April 2017 in line with average earnings. But the Government has now decided to freeze it, meaning many low- and middle-earning graduates will pay thousands more back than they thought they would when they signed up.

Even more important than the additional cost is the message this sends. The regulator would not allow any commercial lender to make a change to its terms this way. This could destroy any trust current and future generations can have in the student finance system, and perhaps, even more widely, in the political system as a whole.

In a way, even though I said the impact of scrapping grants is actually not as bad as people thought, as it’s being converted into loans, the Government has shown it’s willing to change terms even after you’ve got it – of course that leave a risk of future bad changes there too.

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