How much does a student loan really cost you?

Going to university is getting much more expensive, and anyone thinking of taking a gap year and deferring their place from this year to 2023 could find it’s a very pricey move.

From 2023 the student loan system is changing, and graduates under the new system will have a lower repayment threshold, meaning they will start repaying the debt sooner, and a longer repayment period of 40 years before the loan is wiped out, rather than the current 30 years. One positive is that the interest rate on the loans will be lower, meaning graduates will accrue less interest over the period of their loan.

The reality of these changes is that many graduates will repay far more over the lifetime of their loan. But it’s nigh-on impossible to work out what your personal situation will be, as it depends on your future salary, how many pay rises you’ll get, whether you take any career breaks and whether you work part-time at any point in your career.

As a rule of thumb, anyone who is a high-earner will benefit from the new system because the Government has reduced the interest rate charged on loans. Previously it was on a complicated sliding scale depending on how much you earnt, with a maximum of the RPI measure of inflation plus 3%. However, it will now be charged at a flat RPI, which benefits those earning the most, as they will pay off their loan in full and incur less interest before they do.

Conversely, anyone who never earns more than the repayment threshold, either due to low salary or working part time, or who takes significant career breaks will never make a loan repayment and so won’t be affected by the changes in the system.

However, the big bulk of middle earners who will never pay off the debt will face tens of thousands of pounds more in repayments over their lifetimes – leading many to question whether the university degree is worth it. Many will be paying off their debt into their 60s and will clock up 40 years of paying a 9% tax on some of their earnings.

What are some examples of repayment amounts?

First, any calculations of how much you’ll repay on your loan involve a lot of assumptions. And, as you’ll see in these figures, some small-ish changes can have a big impact on the outcome. With these figures we’ve assumed debt of £45,000 when the graduate leaves university.

If we assume a starting salary of £24,000, and that the salary increases by 3% each year, someone under the current system will not repay a penny of their loan as they will never reach the repayment threshold. However, because the threshold is lower and the repayment period is longer under the new system a graduate will repay almost £8,000 before the debt is written off after 40 years.

However, if that same graduate who starts on a salary of £24,000 gets a £5,000 payrise every five years, the figures are dramatically different. Under the current system the graduate will now repay just over £27,000 before the loan is written off – because their payrises have pushed them further over the repayment threshold. But under the new system they will now repay almost £74,000 – far more than they ever borrowed. After 40 years they will still have £38,000 of debt that will get wiped out.

But let’s consider that the individual takes a career break in their lifetime, but still gets those bigger payrises in the years they are working. So if they take five years out in their early-30s, to have children for example, and then return to work on their previous salary, the figures see a big shift again. Now under the current system they will repay a total of £5,500 over the entire 30 years. But under the new system they will repay £33,000. Clearly this is significantly more than the current system, but it’s almost £40,000 less than if they took no career break.

Source: AJ Bell. Assumptions: Assumes RPI inflation of 3%, and that the repayment threshold rises by 3% a year from 2024 under the current system and from 2027 for the new system, as per Government plans. Assumes the graduate's salary increases by 3% a year but also has £5,000 payrises in years 5, 10, 15 and 20 of their career.

So, how does this help?

The figures highlight two things: first, everyone apart from high earners will pay far more under the new system. So if you’re weighing up taking a gap year and you know you’re not going into a very well-paid career, you should factor in the impact of the changes and how much more you’ll likely pay into your decision.

Second, if you’re in the fortunate position of weighing up whether to take out student loans or pay your own way through university (or your family can pay for you) it’s really tricky to work out whether that’s worth it or not. You can make some assumptions about your future career and earning potential, and for some people it will be easier to predict, but it’s not going to be 100% accurate. You could become a low earner (either due to career choice or working part-time) in which case you won’t repay anywhere near the amount you borrowed – and it would be more beneficial to take out the loan. Conversely, you could earn far more than you expect and end up repaying the entire loan plus interest, in which case you would have been better off self-funding.

It’s worth factoring in what else you could do with that money – assuming you have a pot of money sitting there waiting for you to spend. Could you invest that cash and use it for a house deposit instead? Or save it into an ISA for the future?