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09.05.2018

Are Student Loans Debt? – What You Need To Know!

Are we correct to treat student loans like a type of debt? Money Saving expert Martin Lewis doesn’t think so.

If you witnessed him recently on BBC’s Question Time, you will have seen him lose his temper, as Labour MP, Chi Onwurah, claimed the current student loan system was putting off poorer children from going to University.

The consumer rights champion surprised the audience and his fellow panellists with an outburst, during which he exclaimed:

‘…[the]…political football that you and all the parties have used student finance to be, has miseducated a generation about how student finance works. It is an abomination.

“…. when you get your student finance, it works not like a loan but like a graduate contribution system… It does not go on your credit file. It is effectively like mildly increasing the amount of tax that you pay, just like increasing pension contributions also decreases your disposable income. It is not a big issue for getting a mortgage.”

Are Student Loans Really a Tax – Fact Check

So, would it be more appropriate for us to think about student loans as a form of tax, or is it really a debt?

Legally, Martin Lewis is incorrect. Student loans are debts, but unlike other debts, such as credit cards and personal loans, they are types of debt that you only repay if your earnings are above certain amounts, and unlike other types of debts, your monthly payments (if anything) are based on what you earn, not what you owe.

In that way, student loans do resemble a tax, as the deductions are based on your earnings and like income tax are deducted by your employer, (the exception being old-style mortgage student loans, which were taken out by students who began their education before 1998.)

However, unlike taxes, you must opt in to pay a student loan by taking one out in the first place, and if you are wealthy enough, there is no requirement to borrow at all, meaning there is nothing to repay.

Also, even taxes can become debts when you go into arrears, like student loans, which as is the case with income tax, may be unlikely when you are an employee, as deductions are taken from earnings, but where you are self-employed, can easily occur.

The point Martin Lewis was getting at though, is if poorer students allow themselves to be deterred from going to University because of their fear of student loans, this may limit their potential in life and ultimately their ability to increase their earning ability.

Should Poorer Student avoid Student Loans?

It has long been argued that one of the benefits of getting a higher education is it can increase your earning ability over your lifetime, with some research by jobs website Adzuna suggesting this can be by as much as £500,000 over the average working lifetime.

However, other research by the Institute of Fiscal Studies has shown that when average graduate earnings from the lowest performing universities are compared with those of none graduates, even after ten years, many are still earning less than non-graduates.

The point about student loans, however, is where you took your loan out in Scotland or Northern Ireland, or before 1st September 2012 for the rest of the UK (Plan 1 Loans), you don’t pay anything until you are earning over £18,330 and even when you are earning more, you only pay 9% of any amount over that threshold.

Alternatively, if you live in England and Wales, and took your loan out after the 1st September 2012 (Plan 2 Loans), you pay nothing on earnings less than £25,000 and only 9% on amounts over that.  Graduates on lower incomes are, therefore, protected from having to repay their loans.

Also, where you have a Plan 2 loan, if your student loan is not repaid after 30 years, it is written off, even if you have been making repayments; whilst for students with Plan 1 loans, they are written off after 25 years.

The Institute of Fiscal Studies has even calculated that up to three-quarters of students can expect to have some of their loans written off.

Student loans, therefore, are unlikely to be an unbearable burden for even the poorest of graduates.

Can Student Loans affect your ability to obtain Credit?

The general rule is Student loans do not affect your credit rating, although they can where you fall into arrears.  Luckily for most graduates this is unlikely as where they are employees, employers make the deductions. However, where someone does go into arrears, such as when they are self-employed and responsible for making the payments themselves, the Student Loans Company can share the information with credit reference agencies, which means it cannot be said they never affect your credit rating.

However, the consumer watchdog, Which? has calculated the effect student loans have on your ability to borrow for a mortgage is minimal. For example, in the case of someone earning £30,000, they estimate how much you borrow can be reduced by as little as £3-4,000, which is not much when a multiplier of 3 times your earnings is used and means you can borrow up to £90,000.

A controversy unlikely to go away

The debate about student loans, however, is likely to rage on, with average debts for graduates in England now expected to be £50,000, with the average for those from the poorest backgrounds expected to be £57,000. The controversy is also not helped by the fact how much debt you end up with is not simply about whether you are rich or poor, but about where you live, with Universities in England and Wales now being able to charge up to £9,250 per year in tuition fees, whilst for Scottish students, the Scottish Government pays their fees.

Also, in terms of loans for living costs, there is now a rising fear than many students who come from middle income families, don’t realise that the maximum amount they can borrow is limited by their parent’s income, who are expected to contribute to their maintenance. The National Union of Students believe this is resulting in students being left with not enough money to live on and struggling to pay for essentials like heating and food.

It also likely to result in many students acquiring additional types of debt, other than student loans, such as credit cards and overdrafts, which do not have the same protections that accompany student loans.

If you would like to discuss your debt problems with friendly, professional advisers, call a Creditfix adviser on 0800 043 1431.