Here's How To Feel Better About Your Student Loan In One Easy Step
The Debrief: The Debrief spoke to Money Saving Expert Martin Lewis and he gave us some pretty great real talk advice
Photo by Lily Brown
Two words that strike fear into the heart of any graduate, make your stomach sink and cause a rush of anxiety-inducing adrenaline to coarse through your veins: student loan.
Over the last decade we’ve learned to fear the arrival of our Student Loan’s Company statement, resent the repayments that are deducted from what we earn and remain in the gear of ‘angry’ just in case any older people bring up the subject of tuition fees because the thought of all that interest is, frankly, pretty daunting.
It’s all rather exhausting isn’t it? All the worry and low level rage bubbling along on the back burner.
Who can blame millennials for feeling like this? It’s impressed upon us constantly that we are in a huge amount of debt. There’s nothing good about being in debt. Nobody wants to be in debt. The media reinforces the desperate nature of the whole sorry situation. Headlines regularly scaremonger about tuition fees as though they are the 9,000 pound horsemen of the apocalypse. Politicians don’t help either. Before last year’s General Election, the Labour Party said that they would lower tuition fees if they were elected, confirming in prospective students’ minds that they were right to worry.
The anger which surrounds student loans may, to a large extent, be righteous. However, is it necessary to worry about them so much? Is there a better way to approach your debt?
I graduated 6 years ago. I’m still paying off my student loans. It sucks, sure, but has the sky fallen in? No. It would be wrong to belittle the (very legitimate) anger and frustration that many young people – whether they are graduates, current students or prospective university goers – feel about the way our university system has been handled by politicians in recent years. The great tuition fees hike of 2010 was dealt with awfully by the Coalition Government of the time and announcements about any subsequent changes have been completely bungled.
It’s easy to feel powerless when it comes to student debt. However, there are ways that we can reclaim the conversation and change the narrative, setting a more positive tone – particularly for those under the age of 18 who might currently be looking at the situation and deciding not to go to university at all. Is it possible that the bark of this debt is worse than its bite?
The Debrief spoke to Martin Lewis, the Money Saving Expert, who was involved in the initial consultations with the Government on tuition fees and has since campaigned on making the system as fair as it can possibly be.
He told us how we can hack our student loans, and find a silver lining simply by looking at the facts and altering our perception of the reality as it’s presented to us by politicians and the media.
Most recently the Money Saving Expert has implored us all to ‘ignore newspaper headlines about students leaving university with £50,000 of debt. That’s a mostly meaningless figure.’
For Martin there’s a fundamental problem with the way we talk about borrowing money to go to university from the Student Loans Company: the fact that we use the language of loans and debt when we don’t necessarily have to do so.
He says, ‘the fact that student loans are called “loans” has been hugely detrimental for two reasons:
One - it’s a very scary term that puts people off. Especially if they are from non-traditional university backgrounds who tend to be the most debt averse.
Two - because its normalised debt for an entire generation.’
Martin breaks down the issue further and explains that ‘in reality, the student loan is not a loan. It’s somewhere between a loan and a tax. In other countries they call it a “graduate contribution”. Calling it a loan makes it very difficult to explain how it really works – if you replace everything I say with “contribution” from here you’ll see that it makes more sense. What counts is not how much you borrow, but what you repay; for some that’s far more and for others it’s free.’
‘With your student loan your tuition fees are given to you and some of your living costs – you don’t have to find that money upfront. Your repayments are set at 9% of everything you earn above £21,000. It’s very simple: the more you earn the more you repay.’
So how does substituting the word ‘loan’ for ‘contribution’ change things? ‘Imagine I’d said “contribution” not “loan there: – the more you earn, the more you contribute – that makes more sense – if you’re not earning 21,000 then you don’t have to contribute.’
‘The one big difference between this loan and a tax is that you only repay this until you’ve repaid what you borrowed or until 30 years has passed’, he adds, explaining that our student loan repayments are like a tax which expires after a finite amount of time if we don’t manage to repay our debt.
Student loans are also very different to bank loans or credit card debts. Martin stresses this as being one of the key reasons why we need to think about them differently: ‘As with a tax you pay this from a payroll, it is deducted from your net earnings. This is unlike a loan where you get paid and have to give the money to a loan company – you never get this cash – your take home pay is reduced at source.’
‘The majority of graduates will not repay what they’ve borrowed within the 30 years’ Martin says, ‘put quite simply the amount you borrow and the amount of interest you repay on it is irrelevant.’
Does Martin think we should be worrying about our student loans and university debt? In a word, no. ‘Unless you’re a high earner don’t look at your student loan statement – don’t let it scare you. You’re going to pay 9% of what you earned for 30 years – so that is why it’s far more like a tax.’
So what are the actual implications of borrowing money to go to university and graduating with a large bill as a result? ‘Let’s take a look at what it actually means to take out a student loan’ Martin says, ‘you will repay a higher rate of tax than your contemporaries who didn’t take out a student loan, for 30 years of your working life.’
Martin does the maths:
‘Everybody in the country is allowed to earn £11,000 a year without tax. Above £11,000 to £21000 everybody pays 20% tax. So someone who didn’t go to university will pay 20% tax but a graduate will effectively pay 29%, that’s 20% plus 9% for their student loan.’
‘If you earn above £43,000 the amount above £43,000 that a non-graduate is taxed is 40, for a graduate it’s 49%.’
‘And then, if you’re lucky enough to earn above £150,000 it’s 45% for a non-graduate and 54% for a graduate.’
‘This’ Martin says ‘is the correct way to think about student loans’. I do, genuinely, feel reassured. It’s much easier to think of my student debt as a 9% deduction on my income than it is to contemplate it as a huge wobbly and ever expanding black hole in which Stranger Things-style monsters dwell as my interest accrues. This is far more manageable, it makes complete sense and, above all, it feels fair. That hot, quick and creeping sense of injustice that normally burns in my brain when I talk about my student loan is nowhere to be felt.
‘If you go to university and you end up on a low salary afterwards, well then actually your education won’t cost you very much at all – if anything’ Martin says, ‘if you earn under £21,000 for 30 years you won’t repay anything at all but if you’re a high earner you end up repaying a lot.’
Martin does acknowledge that sense of injustice isn’t totally misplaced. ‘We hear a lot about “free education”, but free education does not exist. The question is about who pays for education. The choice we have is quite simple: it’s either the tax payer or the individual. What happened in 2012 is that the dial was shifted so that an increased burden was put on the individual and not the tax payer. Now, there are pros and cons to this. Some would argue that its quite right but others would say that we’ve had generations who have benefited from ‘free’ university education so why should this generation have to pay?’
He does, however, think that our current system is fair. ‘The underlying structure is the best structure that we could have’ although he says that he ‘wouldn’t have set the repayment thresholds where there are now’ if it had been down to him.
I ask him to explain this, he says ‘the stupidity in this is that at the last election the Labour
Party talked about dropping fees to £6,000 but, in truth, all that did was save high earners money because only high earners will be paying the loan off within 30 years. It was a policy which looked like it helped the poor but it helped the rich.’
So, what would he do? ‘If you wanted to change the system to help those who don’t go on to become high earners after university you don’t drop the tuition fees, you up the repayment threshold – say make it 10% above £25,000. That would mean higher earners pay more and lower earners don’t pay.’
As Martin sees it ‘the problem is that the fundamental misunderstanding about how student loans work means that parties put out policies like that which do nothing and they know it, but on paper it looks good. The only benefit of Labour’s proposal was a psychological one - £6,000 a year sounds like less than £9,000.’
Martin would go even further and change the narrative around the much discussed and highly contentious scrapping of student grants earlier this year. ‘What they’ve actually done’ he explains ‘is increased the means tested portion of living loans which means parents are expected to pay more. This means that the amount that students are expected to live off is much lower. This is another one of the problems with using the word “loan”: we need loans to increase, not decrease. If we called it a “contribution” it would make more sense. The amount that students receive should be bigger – students need more to live on, especially those from lower income backgrounds.’
Martin’s notion of changing the narrative and thinking of student debt as a tax as opposed to a loan does make sense. Ultimately current students and recent graduates alike are caught up in a mess made by politicians who decided to frame the conversation this way and neglected to properly consult young people or explain to them how the system would work. When all’s said and done, nobody wants to owe tens of thousands of pounds when they start working. It’s a horrible feeling and a big worry for many of us. Whether or not the onus should be on the young to pay tuition fees is another conversation but, as things stand, we can at least put a more positive spin on things.
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