Money

How does student finance work? Your introductory guide

Published

3 days ago

September 16, 2024

How does student finance work? Your introductory guide

Student loans aren’t just for undergraduates. You can also get support if you are studying for a master’s degree.

This is known as a Postgraduate Master’s Loan and covers course fees and living costs. The support is worth £12,471 if your course started on or after August 1, 2024.

A person using the full student finance on offer, so £9,250 from a tuition fees loan and £13,348 in maintenance support, would leave university with debts starting at £67,794 before interest.

That is a scary amount of money for someone to start their working life owing. But unlike a traditional loan, the money won’t necessarily have to be paid back straight away or, in some cases, you may never pay it back.

Repayments only become due in the April after a student graduates and once they earn above a certain threshold, depending on when and where they started their course.

For example, students who went to university in England between September 1, 2012 and July 31, 2023 will be on “Plan 2” student loans. Under these plans, repayments only start once the student earns above £27,295 and any loan that’s left is written off after 30 years.

The threshold has been lowered for anyone starting a course in 2023 under new “Plan 5” student loans. Repayments start once a student earns above £25,000 and the loan is only written off after 40 years.

Repayments are based only on the portion of salary above the earning threshold and the money will usually be taken directly from your payslip unless you are self-employed in which case you would repay through a self-assessment tax return.

Many people may never earn enough to fully repay the loan and there is no pressure to, but it is worth bearing in mind that the level of student debt will be considered by banks when applying for other finance such as a mortgage, so could impact how much can be borrowed in the future.

That creates a quandary for parents as you may want to help your child avoid being lumbered with student debt by paying their tuition fees upfront. On the other hand they could learn some valuable financial life lessons about managing a budget and may never have to repay the debt.

Interest is added on top of student loans at different rates depending on what plan you are on. Unlike conventional loans, you do not need to start paying off the money straight away but the interest is added as soon as the money is paid out.

The amount of interest charged also depends on when the loan was taken out. It is set at the start of each academic year based on the retail prices index (RPI) figure from the previous March.

Under Plan 2 student loans, the interest added while studying is based on the RPI plus 3 percentage points.

Anyone earning below the £27,295 threshold once they finish their course will only have interest added at RPI. The interest rate charged once a graduate earns more than the threshold increases by RPI plus 3 percentage points until they earn £49,130, when it is capped.

For students on new Plan 5 loans, interest is charged in line with the RPI. That means paying lower levels of interest but repayments start sooner as the earnings threshold is now £25,000.

You will need to set up a bank account to receive the maintenance loan and student accounts typically come with handy perks.

From interest-free overdrafts and cashback, to railcards and even a subscription to a meditation app, there are plenty of freebies on offer.

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