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This is something I’ve always wondered about and have never really found a satisfactory answer. Maybe I've misunderstood how student loans work.

I've completed a Uni course (plan 2) after borrowing £27000 for tuition fees, plus £9000 in maintenance loans, so £36000 total.

Essentially, isn’t it possible for me to not ever repay my student loan in full, even if I'm above the repayment threshold? Let’s say I earn £30k per year. Currently (as of 6 April 2018) that means I’ll repay £444 per year. If I do this for 30 years, at the end I’ll have repaid £13,320, which isn’t even half of the total loan, and after that point the loan gets wiped anyway. I guess the idea is that at some point I’ll earn more than £30k per year and will ultimately end up paying off the full amount, but it’s still possible for this not to happen, right? If so, isn’t this bad for the government, because they’re lending out money they might not get back?

  • Could you not increase the threshold you pay per year to offset the loan? – MHL Apr 25 '18 at 10:48
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    @MHL you can make voluntary payments, but why would you? Even if you take into account pay progression over the 30 years, most students will not pay off what they borrowed, never mind the interest. Plus the debt isn't considered when looking into credit history, so you can essentially think of it as a 30 year graduate tax. see moneysavingexpert.com/students/repay-post-2012-student-loan – Louise Davies Apr 25 '18 at 14:03
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    If you want to learn more about a system where there is no forgiveness for student loans you should look at the American Student Loan Industry. – Reed Apr 25 '18 at 20:23
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    @MHL - Yes, you are allowed to overpay (i.e. pay more than the minimum) and clear the debt quickly. But, as others have pointed out, that strategy is a net loss for most people, as paying off the whole debt is more expensive than paying the minimum for 30 years and then having the debt wiped. – AndyT Apr 26 '18 at 8:30
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    @MHL yes, you can make voluntary payments so you could pay off 5k a year, but again why would you? Most people who pay the minimum won't finish paying off their loan in the 30 year time limit, so "front-loading" and paying it off early is usually detrimental. You'd be better off just investing the 5k a year and even if you do end up paying off the initial loan and start paying off the interest, the amount you'd have profited via your saving would vastly outstrip the loan repayments. – Louise Davies Apr 26 '18 at 8:31
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The UK Student Loan system is best thought of not as a loan, but as a tax on future earnings. You are correct, the majority of people will never clear their debt, a substantial portion won't even repay the base sum they borrowed. This is all costed into the whole student loan system of funding, and the focus is to (broadly) break even, as opposed to traditional loans which seek to make profit on loans provided. The gain for the government is an educated population with greater earning potential. The risk is that it might cost a little if payments are lower than loans given out, however it is still a substantial saving on, say, the Scottish model where there are no tuition fees and the government foots the whole bill regardless.

Martin Lewis waxes lyrical about the student loan system in the UK and how widely misunderstood it is (check out his website here: https://www.moneysavingexpert.com/ and search for student loans).

There are some very key differences between a traditional loan and a (UK but not Scotland) student loan in that:

  • Student loans don't affect credit scores
  • There are no penalties for non-payment
  • Debt is wiped after 30 years regardless
  • There are much fewer circumstances where making extra payments is beneficial
  • It is automatically deducted from your salary by your employer (assuming you pay tax by PAYE)
  • The debt does not form part of your estate upon death and is written off in such circumstances (thanks to @IMSoP)
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    Yes! Thank you! I wish more people understood exactly this! – Brondahl Apr 25 '18 at 14:37
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    +1 for highlighting the Loan misnomer. UK student finance is not a loan in the normal sense but just triggers a higher rate of income tax for graduates. Most graduates will never repay their "loans" which are wiped after 30 years. – uɐɪ Apr 25 '18 at 14:39
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    @ʎəʞouɐɪ except that very high earners will pay their way out of this tax, ("pay off their loans") which isn't how we normally think of tax working, especially in the UK context where marginal income tax rates rise with income – Chris H Apr 25 '18 at 15:08
  • @ChrisH for main income tax, yes, national insurance however has an upper limit where you pay a much reduced rate on earnings above a certain threshold. – CobaltZorch Apr 25 '18 at 15:16
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    @CobaltZorch true, but NI is a small proportion of total income-based taxes. I also omitted the loss of personal allowance for income >£100k which further complicates the comparison – Chris H Apr 25 '18 at 15:19
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All loans – whether issued by a governmental organisation or not – involve lending out money the lender might not get back.

The repayment structure of UK student loans increases the likelihood of a loan not being repaid in full, but the risk of a borrower's income history leading to the writing-off of the loan after 30 years isn't fundamentally different to the risk that they cannot afford to pay off a loan of any kind and end up defaulting.

To some extent the interest paid on loans that do get repaid offsets the losses on the loans that don't. A private lender aims to ensure that the profit left over after these losses is sufficient to make the risk worth it. For the UK government, an overall loss, paid for by taxpayers, may still be deemed acceptable because the aim of issuing the loan is some public good rather than to benefit directly from having issued the loan.

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    Additionally, there are other ways that providing the 'loans' saves money. For instance, an educated populace may be more healthy overall (or more economically utilize health services), which will reduce potential healthcare costs. Additionally, they may end up creating more innovation and more, higher-paying jobs in the UK, bringing in more tax revenue overall. The key is that the "public good" isn't necessarily just altruistic, but can also have positive financial implications. – Nate Diamond Apr 25 '18 at 17:24
  • "the risk of a borrower's income history leading to the writing-off of the loan after 30 years isn't fundamentally different to the risk that they cannot afford to pay off a loan of any kind and end up defaulting" - Incorrect. It is fundamentally different, as for a normal loan a small percentage of borrowers will default, whereas for a UK student loan a high proportion will not pay it off. – AndyT Apr 26 '18 at 8:36
  • I noted the quantitative difference at the start of the same sentence you're quoting from. In this context I would have thought it clear that a difference in proportion is not a fundamental one. It doesn't change any of the reasoning associated with offering a loan, only the value of expected profit/loss that comes out of that reasoning. – Will Apr 26 '18 at 9:05
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If so, isn’t this bad for the government, because they’re lending out money they might not get back?

Basically, using its citizens money to improve the overall standard of living is the main (one could even say the only) task a government really has, so spending money is not a bad thing, it’s by design. If you will, student loans (that are discounted) are a form of government subsidy.

Then, the question could be, why even bother to loan the money? Why not simply make college free?

That is simply a budged-saving technique or leverage to maximize the amount of people you could support with a given budget. By having those that can afford to pay some of the money back, you don’t have to finance it all in tax money.

6

Yes, it's not only possible but expected that most students will never repay all of their loans. The government still benefits by getting an educated workforce that pays more tax because it's better paid.

6

Yes, it's in fact likely you'll never pay it off fully and this has (notionally) been factored into the costing of the system. The worst situation for you to be in is actually around the £30k mark - too slow to pay off the capital, but still enough that you'll have fairly high repayments.

I find it highly worrying that we are saddling 17-18 year olds who have little to no appreciation of the process with vast amounts of debt. Now, it's not something you must carry on paying regardless of situation, but it's still a high financial burden to carry for a long period of time.

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    "saddling 17-18 year olds ... with vast amounts of debt" Student Loans really, REALLY aren't debt in ANY meaningful sense. They don't contribute to your credit score, you don't have any choice or control in the repayments, you can't forget to pay or have already spent the money, so you can't get reclamations invoked against them, they aren't going to cause you a problem if you're suddenly unemployed, they barely incur interest, and (as is the point of this question) you don't actually HAVE to pay off the capital. They are a TAX, not a DEBT. – Brondahl Apr 25 '18 at 14:36
  • Comments are not for extended discussion; this conversation has been moved to chat. – Ganesh Sittampalam Apr 27 '18 at 10:45
  • The worst situation is not the £30k mark. As @Brondahl noted, you can effectively consider it as a tax. Earning more money always means taking home more money. There is no situation where you are better off earning less in order to repay less. So the "worst situation" would, I suppose, be earning nothing. – Michael Apr 27 '18 at 11:48
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Essentially, isn’t it possible for me to not ever repay my student loan in full, even if I'm above the repayment threshold?

[...]

I guess the idea is that at some point I’ll earn more than £30k per year and will ultimately end up paying off the full amount, but it’s still possible for this not to happen, right?

It is not only possible, but for the average student it is likely the student loan will not be paid off in full. Some ex-students will never make any payments at all. A BBC article from 2014 states that "Around 45% of university graduates will not earn enough to repay their student loans, the government now believes."

If so, isn’t this bad for the government, because they’re lending out money they might not get back?

The government has traditionally subsidised higher education (the benefits to society of an educated workforce being best left to another question). However policy over the last few decades has been to transfer more of the costs onto students in order to reduce the costs borne by the government and to increase investment. This has been done by reducing or eliminating grants, by increasing tuition fees, and increasing the interest rate on tuition fees funded through the student loan system.

As the balances owed by graduates increases, it is to be expected that increasing numbers will be unable to repay the loan in full. However, initially it was "estimated that 28% of loans would never be paid back in full" (BBC, 2014) and that the costs of the new system would exceed those of the old one "if 48.6% of all student loans were not repaid".

Since the BBC article was published, the government initially froze the student loan repayment threshold at £21,000 instead of increasing it annually as previously promised, in order to reduce the cost of the system. However, this year the government has raised the repayment threshold to £25,000. It will remain the case that for large numbers of graduates the loan will never be repaid in full.

Source: http://www.bbc.co.uk/news/education-26688018

2

Ah politics.

Politicians want to spend tomorrows money today but they know that national debt is something that gets looked at by both a certain category of voters and also by financial institutions (both domestic and foreign).

So methods that allow them to spend tomorrows money today without it actually being considered national debt are attractive to them. Witness the huge explosion of PFI.

Until relatively recently student loans were something that students were expected to repay except in highly exceptional cases, but the government cranked up both the total amount lent and the interest rates while not increasing the required repayment rate, raising the repayment threshold and for most students* reducing the time until the loan is written off. The result is students now are taking on student loans that some of them will never repay.

In 25 years or so a large number of student loans will be written off which will look bad on the books for the government of the day but present day politicians don't care about that.

* The old writeoff times were age based while the new ones are duration based but for a student graduating at the normal age the old times were much longer.

1

Bear in mind that, because of the threshold, it doesn't scale like I think you're imagining it does. You're currently earning £30k which is £5k over the £25k threshold, so you're being taxed on 9% of £5k. Your repayments work out very low - £444/year.

To keep things simple, say your salary doubles to £60k gradually over the next 30 years. You will then be paying 9% of £35k. This would work out to £3144/year. Your salary has only doubled but your student loan repayments have multiplied by seven^.

But is £60k a reasonable number? In the US, the average worker's salary increases by roughly 38% over their career, with the largest increase in your twenties.

To keep the maths simple again, let's say your salary increases by one third in 10 years time, but then remains constant for the final 20 years. You would pay £4400 in the first 10 years plus £27,000 over the last 20 years. You'd only have around £5k of debt remaining which would be wiped. This is very conservative, though, as it doesn't account for the ramp up over those initial 10 years.

To put it simply, the repayment system is designed so that most people will repay most of the loan by the end of the 30 year term. It will of course depend on your personal career goals but even if you stay in the same position for the next three decades without a raise, recouping one third of their capital isn't necessarily a particularly outcome - as other's have already noted, governments are able to tolerate losses on student loans because having a well-educated population can generate income in other ways.


^ If you're curious, your take-home pay would work out about 1.7x your current salary, due to the higher tax bracket and increased loan repayments.

  • 1
    You have forgotten a really fundamental part of the calculation. The £25000 threshold is not fixed but (providing that the politicians do not repeat their failed attempt to fix the threshold) will rise over time, hopefully in line with average earnings so by the time that we get 10 years down the line and your salary has increased so will the threshold. This increase will obviously not match the salary increase but it will reduce the repayment burden. – uɐɪ May 1 '18 at 10:23
  • @ʎəʞouɐɪ I didn't forget it. We cannot make any predictions about what the threshold will be so it makes no sense to speculate on it. AFAIK it's fixed for at least the next 3 years, and I'd suggest it's unlikely to change that drastically. I also excluded the effects inflation and interest accrued on the loan to keep things simple. The point of my answer was to draw attention to the fact that the threshold was skewing OP's perception, not to predict his exact repayment schedule (there are too many variables), and I think I did that perfectly well. – Michael May 1 '18 at 11:54
  • The uprating to £25000 is from this April and the statement from the Govt that I saw said that after that increase it will then be uprated annually "in line with the annual average earnings growth". – uɐɪ May 1 '18 at 12:40

protected by Chris W. Rea Apr 26 '18 at 18:16

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