Martin Lewis, 45, returned to This Morning after the Easter break with some financial good news.
The money saving expert discussed the recent changes to student finance, and explained how repayments are changing for university leavers.
Explaining the difference between student debt and repayments, Martin said: “Much student loan talk focuses on the overall debt. Yet for most people that’s far more a psychological issue than a financial one.
“You start being eligible to repay student loans in the April after you leave university. What you repay each month depends solely on what you earn, eg, up until now most recent graduates repay nine per cent of everything earned above £21,000. So take £31,000 earnings (just as it’s easy maths)…
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Owe £20,000: you repay £900/yr
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Owe £50,000: you repay £900/yr
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Owe £3,000,000 (if tuition fees were absurdly hiked to £1m a year): you repay £900/yr
“The only difference what you owe and the interest makes is whether you’ll clear the borrowing within the 30 years before it wipes. And most current graduates won’t, meaning the student loan works far more like a nine per cent additional income tax for 30 years.”
He then went into detail about what has changed, and said: “The repayment threshold has increased. Exactly how much depends on when and where you started uni.
“Plan 2 loans: All English & Welsh loans for those who STARTED uni in/after 2012. This has been nine per cent of everything earned over £21,000 ever since these loans launched in 2012. Now, finally, that threshold has been increased to nine per cent of everything above £25,000.
“This means at every level of income you’ll repay £360/year (£30/month) less, and those who currently repay less than £360/year won’t repay anything. For example…
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Earn £20,000 you were repaying NOTHING, you now repay NOTHING
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Earn £25,000 you were repaying £360/yr you’ll now repay NOTHING
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Earn £35,000 you were repaying £1,260/yr you’ll now repay £900
“And from next year this figure will rise annually with average earnings.
“Plan 1: All loans for those who STARTED between 1998 and 2011 plus Scottish & Northern Irish loans since 2012. This moves each year with inflation, and this year it rises from £17,775 to £18,330, so those who repay this now, will see repayments drop by just under £50/yr.
“Pre-1998 starters: These loans work very differently and the figures there don’t change until September. In a nutshell though, here you are allowed to defer repaying if you earn under £29,219.”
Answering a common question in regards to student finance, Martin explained if repaying less a month means more interest in the long run.
He said: “While for cash-flow purposes paying less each month is helpful, the normal rule with loans is try to repay as much as possible as fast as possible, to clear the debt as quickly as possible, so there’s less time for interest to accrue.
“Yet student loans work a very different way. That’s why I was very forcibly campaigning for this to happen after the Government U-turned on its prior promises to increase the threshold (thankfully it then U-turned on the U-turn).
“After these changes it’s predicted (by the Institute of Fiscal Studies) that only 17 per cent of Plan 2 students will clear the loans in full before they wipe within the 30 years.
“In other words, all but the highest earners (or those who didn’t take the full borrowing) will simply pay nine per cent for 30 years until it stops. Therefore paying less each month also means paying less in total, possibly £1,000s over the years.
“For those on plan 1, as the change is limited so is the impact. Yet as people with plan 1 loans had no or very low tuition fees and lower interest – they’re far more likely to repay their loan before the debt wipes. So increasing the threshold can mean you repay more interest in total, but the interest rate here is just 1.5 per cent so it isn’t such a big deal.”
These aren’t the only changes, and Martin revealed: “The amount of interest added for Plan 2 loans has changed for some. The rate changes with RPI inflation each year. While studying you pay inflation (currently 3.1 per cent) plus three per cent, but it’s the thresholds after that are new.
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Earn under £25,000 (before 6 April was £21,000): Interest rate = RPI
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Earn over £45,000 (before 6 April was £41,000): Interest rate = RPI + three per cent
“And if you earn in between it gradually rises on a sliding scale. This means less interest added for many, though the real impact is limited, as many won’t pay the full interest added, as they don’t clear the loan in full within 30 years (see links above for why).”
For more help from Martin on student finance, read his myth busters guide here.
