A summary of the not inconsiderable costs associated with going to university
The soaring cost of educating children is a hot topic for many clients. The increase in the maximum annual university tuition fee to £9,250 in England has given an added impetus to the need for financial planning in this area. Putting a child through university, with its attendant tuition fees and living expenses, is just one of several uphill struggles facing parents. This may help explain why record numbers of students are choosing to live at home with their parents.
Costs of Further Education
Using the University of Kent’s cost of living calculator for an undergraduate living off campus the annual cost of living, including books, food, clothes, travelling to and from college is between £12,376 and £22,256. That is between £37,128 and £66,768 for a three-year course, assuming 2% a year inflation. This cost of living does not include the tuition fees that students are required to pay.
According to The Institute of Fiscal Studies an undergraduate from England is likely to accumulate student debt of up to £50,000 by the end of their course – regardless of whereabouts in the UK they study.
Students’ marginal “tax” rate could be 40%: Students starting university on or after 1 September 2012 start to repay their loans once they are earning over a certain threshold (depending on the which loan plan they have) – at a rate of 9% of any further income. This would generally lead to graduate employees paying a marginal rate of “tax” of 41% once they exceeded the threshold i.e. 20% basic rate income tax plus 12% class 1 national insurance contributions plus 9% student debt repayment. The employer would collect the repayments from employees´ earnings under Pay As You Earn and send them to HMRC who would forward them to the Student Loans Company Limited (SLCL is wholly owned by the UK Government). Self-employed graduates would pay to HMRC under Self-Assessment. Borrowers who are not part of the UK tax system would pay direct to SLCL.
The maximum university tuition fee for England is £9,250. This is the highest amount that any student can be asked to contribute. Many students who started courses in years up to and including the 2015/16 academic year were in fact able to contribute less than this as they could have been entitled to a maintenance grant. Different rules apply depending on whether students depend financially on their parents or they live with someone or are independent. Maintenance grants were replaced with loans for new full-time students in England starting their courses from September 2016. Since 1 August 2016, the student finance package has consisted of a tuition fee loan and a maintenance loan only. However, new students are still able to apply for grants if they’re eligible for certain benefits, disabled, or need help with childcare costs.
For students dependent financially on their parents, what is relevant when assessing eligibility for the full maintenance loan (or pre-August 2016 grant) is the household income (i.e. income before deductions but after certain allowances). Where the student is married, in a civil partnership, or living with someone, the husband’s or wife’s or partner’s residual income is taken into account to work out the contribution.
Tuition fee loans are available up to £9,250 a year for new full-time students and are not dependent upon household income.
Living costs at university
Tuition Fee Loan
It is possible to apply for a loan up to £9,250 for the 2021/22 academic year. Those who are studying an accelerated degree course could get up to £11,100.
Full-time students can apply for a Maintenance Loan to help with living costs during their period of time at university.
How much Maintenance Loan a student can receive will depend on the household income and where the student will live and study.
For students who start their course in the 2021/22 academic year, a maintenance loan will be available to compensate for the fact that maintenance grants are no longer provided. The maximum maintenance loan rates for those commencing study in September 2021 are as follows:
|Maximum Maintenance loan|
|Living away from home and studying in London||£12,382|
|Living away from home and studying outside London||£9,488|
|Living at home||£7,987|
If the course started before 1 August 2016, the Maintenance Loan limits are lower and it was also possible to apply for a Maintenance Grant and Special Support Grant – details of this can be found on the gov.uk .
Interest is added, the headline rate is 4.5%
Student loan interest is set based on the (RPI) rate of inflation – the measure of how quickly prices of all things are rising and it changes annually each September, as follows…
While studying: RPI + 3%. From September 2021, it’s been 4.2% (due to a temporary rate cap; this will drop to 4.1% from October before the rate reverts to 4.5% in January).
From the April after leaving: It depends on earnings. From September 2021, for those earning under the repayment threshold it’s RPI (1.5% at the time of writing), rising on a sliding scale to RPI + 3% if you earn over £49,130.
Repayment of loans for tuition fees and maintenance
Since September 2006 no full-time undergraduate student has to pay fees up-front. Instead, students can defer payment of their tuition fees until after they leave university.
Students who start their course from 1 September 2012 onwards will only start repaying their loans once they leave university and have income over £27,295 gross a year.
The repayment rate is 9% of income over the current threshold per annum. Income includes unearned income from investments. For most people the repayments will be collected under the PAYE system.
For example, a student with income of £30,000 will have to make a loan repayment of £243.45 ([£30,000 – £27,295] @ 9%, i.e. about £20 a month.
During the time that any part of the loans are outstanding, the loans will accrue interest at a rate dependent on the student’s income.
In England and Wales, if the student entered higher education on or after 1 September 2012, then any loan remaining after 30 years from the April following the end of the course will be written off. In practice most students are expected to see some debt written off – the Department for Education has projected that only around 30% of the full-time English undergraduates who started a course in the 2017/18 academic year will fully repay their loans.
The Augur Review
In February 2018 the then Prime Minister launched a review of post-18 education in England, headed by Philip Augar. The review, which was published on 30 May 2019, focusses on four areas: choice, value for money, access and skills provision.
The review suggests the maximum tuition fee should be frozen at its current level for the 2019/20 and 2020/21 academic years and then reduced to £7,500 in 2021/22, with its availability extended to many further education courses. Indexation of the cap would resume from 2023/24. Augur suggests the introduction of a single lifelong learning loan allowance for tuition loans, set at the equivalent of four years’ undergraduate fee funding.
Augur proposes that the threshold at which loans start to be repaid should be cut (in 2018/19 terms) from £25,000 to £23,000.
Augur also calls for an increase in the term before loans are written off from 30 years to 40 years, starting in 2021/22.
On interest rates, (currently a maximum of 6.3%, falling to 5.4% from 1 September 2019), Augur proposes that during study, the interest rate charged should match inflation, rather than the current inflation (RPI) + 3%, i.e. the debt would not grow in real (RPI) terms. Post-graduation interest rates, which are income-related (minimum RPI for income up to £25,725, maximum RPI + 3.0% for income of £46,305 or more) would be unchanged.
The review coincides with a new approach from National Statistics on accounting for student loans, which is currently due to take effect from September 2019. This will more accurately reflect the fact that an element of student loans are effectively grants because of the amount written off. The change is expected to add over £14bn to the Government deficit in 2020/21, a figure that will concentrate minds.
Credit: Tech Link