It's Kia, this is A Little Bit Richer. And today I'm taking a deep dive into the world of student loans. Student loans are one of those things that it's so easy to just take a passive approach to. You go to uni, you get the loan, your repayments start, and you more or less forget about it. But this podcast
is all about taking back control of all of your finances. And the first step to getting that control is to understand it. With me today, to help us get to grips with all this, is Abigail Foster. Abigail is a chartered accountant and she's a founder of Elent, a financial education hub for students, employees, and parents. As part of this, she runs workshops all about student loans, so I knew
I had to get her on to learn more. Abigail, people listening to this can have all sorts of different student loan repayment plans. It's changed a lot. So let's begin. Could you talk me through all the different plans?
Okay. Yes, there's been many different plans. We'll talk about the undergrad modern plans, so one, two, and five. So one was if you went to university pre- 2012, I think it was post- 1998, but pre- 2012, you would've been paying the tuition loan at about 3K, very, very nice amount of money, I wish I'd paid that. Then you had plan two, which came in from 2012. So any students that went to university from 2012 to 2023,
you were on plan two. And then any university student that goes to university from this year, so from 2023 onwards, they are now on plan five.
Wow. Okay. So how do all of these loans work? I mean, if you think about a loan, we think about interest rates, right? So you might take out a credit card at a certain amount of interest rate and you now what you're going to pay. Is that the same when it comes to student loans?
The interest rates on all three plans frustratingly all different. Like to make it nice and complicated. So plan one is either RPI, which stands for Retail Price Index, better known as inflation; or the Bank of England base rate
plus 1%. So often what's happened with plan one is the interest rate has been lower because it's that Bank of England base rate plus 1%. Then for plan two, they had the interest rate set at RPI plus 3%, so Retail Price Index also known as inflation plus 3%. So when inflation got crazy high last year and we saw those 11. 9% numbers of inflation, we saw huge
interest on the student loans. Plan five, they decided as their nicety for changing the plan, was they basically introduced interest and cut it back to just RPI, so just inflation. So there is a common misconception that the loan doesn't increase over time, but that's not really true because it
does, it does increase by RPI. But they then assume that that RPI means it's just increased with inflation therefore the real value of the loan hasn't increased, but it definitely does increase over time.
Okay. That's good to know that. So we need to have a look and see, depending on what plan you're on, that depends on what interest rate you are obviously going to have
on your student loan. So when it comes to repaying then, because I know when I was in university not too long ago, I know I've still got my baby face, not too long ago, but when I was in university it was always this thing where I had friends say, " I've taken out X amount, now I'm going to have to pay it straight away." I've graduated and it's almost like the next day
after graduation you're going to have to pay it back. But I want to ask you, what salary do you normally have to be on before you start paying off your student loan?
Okay, with the student loan, again, let's go through one, two, and five. So with plan one you have to be earning over £22, 015, if we're getting specific. With plan two, it's 27,295. And then with the new plan five, you need to earn more than 25 grand a year. So this is your yearly salary. So let's say you are on 25K, then you wouldn't pay anything back on this new plan yet until you earn over 25K. So, you only
pay back 9% over those thresholds. Something to be careful though is that what tends to happen is they'll take your yearly salary, divide it by 12 and then look at your monthly payslip. So if you don't always earn the same every month, you might be overpaying the student loan. And that's something to look out for because it's worked out on a yearly basis, but on your payslip can
often be then brought back to that monthly amount. So yeah.
That makes sense. I think it's good to know that. I've seen people online have decided to take control of their student loans and log in and see if they're overpaying and have been able to actually make those claims back. But I just want to kind of go back to what you said. So when you earn over a certain threshold, you
mentioned it's any income over that. I think people sometimes get confused if it's, like you said, the new plan, it's when you earn over £25, 000, some people think that they're going to pay back 9% of everything, but it's only the income over, right?
It is only the income over the threshold across all the plans. So if you are earning 30K, you are paying 9%, on that plan five, you're paying 9% on 5K. So the difference between your 30,000 salary and that 25K threshold, 9% on that. But it does add up.
Obviously the more you start earning, that 9% is quite a large chunk, which is why we commonly call it a university tax as opposed to a loan because you pay more the more you earn.
Yeah, absolutely. But I think yeah, that was good for you to explain that because I think sometimes ... I know I've spoken to people who have almost avoided taking out, especially maintenance loans, and that's obviously the loan when you're in university that will help you live. And I used that because
I moved away from home. And have avoided taking out more money because they're like, " No, it's a loan and I've got to pay it back and I don't want to graduate and have to pay it all back. Let me just live within my means and maybe make it harder for myself." But I think, yeah, the way you explained it that definitely does help. We
mentioned student loan. Now that operative word loan, will that affect people's ability in the future when it comes to getting a mortgage or any other type of loan having a student loan out?
It can do, so especially with a mortgage because there is a rule which is that the student loan doesn't impact your credit score, which then commonly misconstrued as therefore it doesn't impact your mortgage. That's not true. So it doesn't impact your credit score in the terms it doesn't get ... it's not information that filters into your credit rating agencies, which then provide you with a credit score. But
it can affect how much mortgage you get. Because if you went to a mortgage provider or you went to a mortgage advisor, et cetera and said, " Right, this is my income." They would say to you, " Okay, what are your outgoings?" And they will look at your outgoings, one being your student loan. So if you are earning over that threshold and you've got quite a large chunk coming out for student
loans, that can affect how much you can borrow. So that's where it can affect your mortgage. There is discussions around if it can stop you getting a mortgage, it shouldn't be able to stop you, it's not like a bad note on your credit score. It is just something to be aware of that it can reduce how much mortgage you can get.
I think that's good to know. So it is just part of the affordability checks that the mortgage providers do. It is part of what are you paying, what are your outgoings, and that's just one of them if you don't earn over
that. I think that's good to know. Now there's a big question, and one I know a lot of people want to know, should we, as in former students who've now graduated, should we prioritize paying off our student loans or should we just carry on as we are?
When it comes to paying off your student loan, you need to put yourself in one of two camps. So one, if you are not earning enough that you are noticing it on your payslip, leave it. Just leave it be. Because once you pay off that student loan, if you've voluntarily chosen to, you can't go back to the Student Loans Company and get that money back. And that money is gone. So whilst you might be taking down the
loans, but you will end up with less money. And obviously less money in your pocket, which you could have used for better things. If you fall into the other bracket where you are noticing a huge amount of money going out of your payslip for student deductions, then it's time to look into whether you should be paying off early. Because like I said at the beginning, those interest rates are not to
be laughed at. They are really hefty. And by paying off large chunks, you can obviously reduce the time left you've got to pay. Because if you know you're going to be paying it off in full obviously, and you have that disposal income to do so. Do not bankrupt yourself trying to pay off your student loan. That is really important.
I think a lot of people say, " Oh, well, I'll go to my parents and ask for money or I'll take out another loan to pay off my student loan." Please don't do that because it's a really flexible loan you're not going to find anywhere else. And that's why we call it, like I say, university tax as opposed
to a loan. But yeah, there's two camps there really, and it very much depends on how it impacts you and your monthly earnings.
That's really good to know I think. Yeah, so it all depends on what your income and outgoings look like. Because like I said I have conversations even with my friends who say, " Oh, I need to pay off my student loan." But I think it is a very personal decision. It is how much does it actually impact your income as to whether or not you should.
It's so personal because also obviously some parents really struggle with it because our parents didn't have this or particularly my parents never went to uni, so they don't quite understand how ... they don't get why it's such a big amount of money, but I'm not worried about it. So the older generation looked at our generation and just can't
imagine why we're not paying this off quickly. But it's because it's not really the same.
Yeah, yeah. It's not how they view maybe mortgages where they may overpay their mortgages, it's different like you said. So if there's people who have children now or are thinking about having kids in the future, what could they be doing to think about their kids going to university before they hit 18 to make that all easier when it comes around?
In terms of funding it, I suppose setting up pots for them for the future. We all know compound interest is king or queen. And therefore the earlier you start the better you can build that pot up. So things like junior ISAs or junior bank accounts for young people are really great ways to just put little bits of
money away now. And hopefully when they get to it at 18 or whenever they choose to go to university, it's a nice pot for them there that can help them with maintenance or even other things to do with uni.
Exactly, exactly. So Abigail, before we go, what three things would you recommend to someone that they can do to help them get a little bit richer?
So, first thing would definitely be check that you're paying the right amount of student loan. So throughout the year, checking in on your student loan website and that you're paying the right amount. Secondly, would be looking to how many years you've got left to pay, because there might be a possibility that you might not pay the entire student loan back. So with plan one, that's after 25
years, it gets wiped. With plan two, after 30. And with plan five, it's actually 40 years. But if you're in that plan two area and you've only got so many years left, you might not need to repay over if you are never going to repay in full. And then third and finally would be education. Please keep your education up to date and your knowledge because the plans
have changed. We know that, we've just discussed it today. But a lot of people don't realize that the plan has changed. And this reflects everything within finance and money right now. Everything's changing. So yeah, keep your education up to date.
Thank you so much. This has been a very insightful episode. It's Black Friday next week, which means Christmas will be here before we know it. So in the next episode, I want to see if there's such a thing as a cost- effective Christmas. Until then, be sure to hit follow and leave us a review. Thank you for listening.