UK student loans and finance explained

1. Introduction

Going to University can be a big decision. Deciding what to study, where to go, and how much it will cost can be daunting when there is so much choice. This guide will explain the situation with fees in the UK so that you are in the best position to decide on your future.

2. University Course/Tuition Fees

At the end of 2010 the higher-education sector in England (not the UK as you will see later) dramatically changed the way it would charge fees to study undergraduate degrees. The headline from these changes has been that state funded higher-education providers can charge fees of up to £9,000 a year for full-time undergraduate courses. Private education providers (usually those which are not universities and colleges) and non-undergraduate courses (e.g. diplomas and postgraduate degrees) are not affected by these changes.

It is only English and European Union (EU) students studying at an English establishment that have to pay the maximum £9,000 per year fee. If you are a Scottish or EU student studying at a Scottish university then you will pay nothing. If you are a Welsh or EU student studying at a Welsh university then you will pay just £3,290 per year. These prices are not available to an English student wanting to study at one of these universities. Therefore it is misleading to consider the government's changes to higher education fees apply to entire UK but are actually more specifically related to England only.

Course fees are just part of the total cost of going to university. You are also likely to incur costs for daily things such as food, rent, bills, materials, and equipment. Luckily finance is available to help you cover the cost of some of these.

International Students

International students pay a different price entirely and have to enquire directly with their institution of choice on the fees they charge.

3. Student Finance

Tuition/course fee loan

Here's some better news if the previous section left a bitter taste; you don't have to pay any of the fees upfront if you don't want to. The government has setup an organisation known as "Student Finance England" who will lend first-time students the money to pay the fees. There is no age restriction and whether you are studying full-time or part-time doesn't matter either, as long as it is your first time in higher education. You cannot get a loan if you already have a qualification at the same level or higher than the one you wish to gain. The only exceptions are NHS-funded courses, PGCEs, or courses in medicine.

Maintenance loans

A maintenance loan is available to help you pay for expenses such as food, rent, and bills. The amount you are entitled to is determined by your household income and the course you are studying. It is paid in instalments into your bank account at the start of each term (e.g. September, January, April). Remember that it is a loan and has to be paid back in the same way as the tuition fee loan.

Table 1.1 Maintenance loans available for full-time students by accomodation type
Full-time student Loan for courses from September 2013 Loan for courses from September 2014
Living at home Up to £4,375 Up to £4,418
Living away from home, outside London Up to £5,500 Up to £5,555
Living away from home, in London Up to £7,675> Up to £7,751
You spend a year of a UK course studying abroad Up to £6,535 Up to £6,600

Maintenance Grants

A maintenance grant is the same as a maintenance loan except that is does not have to be repaid. Whether or not this is available to you depends on your household income.

Table 1.2 Maintenance grants available for full-time students by household income
Full-time student household income Grant for courses from September 2013 Grant for courses from September 2014
£25,000 or less £3,354 £3,387
£30,000 £2,416 £2,441
£35,000 £1,478 £1494
£40,000 £540 £547
£42,611 (2013) or £42,620 (2014) £50 £50
Over £42,611 (2013) or £42,620 (2014) No grant No grant

Getting both a maintenance loan and a maintenance grant

You could be eligible for both a maintenance loan and grant at the same time, but the maintenance loan amount available to you will be reduced if you are also entitled to a maintenance grant. A "Special Support Grant" will let you get the full amount of both a maintenance loan and grant at the same time but is only available if you qualify for income support or housing benefit.

Bursaries and Scholarships

A bursary or scholarship is money that is made available to support students by the education provider and does not have to be repaid. The money is usually awarded to students who have particular circumstances or have done shown exceptional academic ability. Each institution will have different offerings so contact them directly or check the details of each institution in the Inscriptic institution directory for more information on what's available and how to apply.

Fee waivers

Some institutions may offer you a fee waiver rather than providing a bursary or scholarship. A fee waiver reduces the tuition fees you are charged which means your loan will be smaller. You should contact the institution you are interested in to find out more about this.

4. Interest on Student Loans

Interest starts to accumulate on the loan as soon as you take it out. The amount of interest charged while you are studying is the rate of inflation plus 3% per year. The amount of interest charged after you finish your course depends on how much you earn.  The rate of inflation worked out by the government by estimating how much an average 'basket of shopping' costs each year (known as the Retail Price Index). So if it currently costs £100 for a basket of shopping and next year it costs £103 for the same amount of shopping then the rate of inflation is 3%.

If you earn £21,000 or less then you only pay the rate of inflation as an interest charge. If you earn between £21,000 and £41,000 then you pay the rate of inflation plus interest up to a maximum of 3%. If you earn £41,000 or more then you will pay the rate of inflation plus 3%.

Table 2.1 Student loan interest rates by yearly income
Income Interest rate
While you're studying Rate of inflation (Retail Price Index) plus 3%
£21,000 or less Rate of inflation
£21,000 to £41,000 Rate of inflation plus up to 3%
£41,000 and over Rate of inflation plus 3%

You can estimate that you pay the rate of inflation plus 0.15% in interest per thousand pounds earned between £21,000 and £41,000, up to a maximum of 3%. For example, if you were earning £25,000 then you would incur the rate of inflation plus 0.6% as interest charges on the loan.

5. Student Loan Repayments

Your student loan is the total amount of the tuition fee loan and maintenance loan combined. You should also take into consideration the interest charges that will accumulate on the loan to work out how much you will have to pay back. The way student finance is administered is more akin to a graduate tax than a personal loan which means the more you earn, the more you pay. Therefore higher earners will pay back more and for longer than low earners.

The terms of the loan agreement are that you start making repayments once you are earning more than £21,000 per year and if you can't pay it back within 30 years of graduating or leaving from your course then the debt will be written-off. Table 3.1 gives you an idea of how much you will repay on monthly basis depending on your earnings.

Table 3.1 Student loan repayments by yearly income
Your income per year Monthly repayments
£21,000 and under £0
£25,000 £30
£30,000 £67
£40,000 £142
£50,000 £217
£60,000 £292

Essentially you will make payments at the rate of 9% of your earnings above £21,000 per year. So if you are earning £22,000 per year (£1,000 more than the threshold) then you will repay £90 per year or £7.50 per month (9% of the £1000 above £21,000). Of course, if you earn £21,000 or less then you will pay nothing. Payments are taken directly out of your wages by your employer just like income tax and national insurance.

You can pay some or your entire loan at any time without an extra charge. If you leave your course early, you still have to repay your student loan up to the amount you have used.

6. Part-Time Students

The fees for a part-time course are currently a maximum of £6,750 per year. There is no maintenance loan or grant available to part-time students for daily living costs so you must be able to afford to support yourself while you are studying. Part-time students repay tuition fee loans in the same way as full-time students.

7. Affect on Credit Score

Student loans do not appear on your credit file, like a bank loan or mobile phone contract would. This means that if you apply for a loan in the future then the lender will not know about your student loan, unless they ask. Taking this into account as well as the way student loans are administered, it should not have a significant impact on your eligibility to get a future loan.

Because you will get less from your salary due to the student loan payments going out, you may find that the amount of mortgage loan available to you will be less as you will have less income from which to make the repayments than someone who does not have a student loan.

8. Private Degrees

It's not just universities that can award degrees. Many colleges or other education providers are being given the power to award degrees and even identify themselves as a university.  Their fees are usually lower than those of a traditional university and may be a cheaper option you wish to consider.

9. Summary

  • Taking out a student loan is a safe and cheap way to borrow money to fund your education.
  • The total student finance loan is the combination of the tuition fee and maintenance loan put together, plus the interest charges which start from day one.
  • The loans do not get noted on your credit file and can be considered more like a graduate tax than a loan.
  • You only have to start repaying the loan once you are earning enough (current threshold is £21,000 per year).
  • If you earn below the threshold or lose your job then your repayments stop.
  • From 2017 onwards the threshold of £21,000 will increase in line with average earnings so you will have a little more earning potential before having to start making repayments.
  • The only way to work out how much you will eventually pay back is if you can accurately predict your earning potential for 30 years from graduating which is almost impossible.

The student loan system advocates the idea of not worrying about how much you borrow, because it is irrelevant to how much you will pay back. However this is only somewhat true if you will be a low earner forever, but most people will earn more than £21,000 per year in their lifetime. If you have a successful career with an above average salary, then you may end up paying back more than you initially borrowed. A high earner near the beginning or in the middle of their career would be wise to clear the debt as early as possible to avoid paying the accruing interest charges. If you are close to retirement or going to be a low earner, then taking out a student loan is a great option even if you have enough to money to pay the fees upfront because it's unlikely you will ever repay the full amount of debt.