The myths around student loans

Posted in: Finance Last updated: 02 Apr 2013

There was a time when, assuming you were bright enough, the choices around university centred entirely on what course to do and where to do it. Sixth formers poured over prospectuses, debating the pros and cons of campus vs. city centre universities, what the grade requirements were, or which student union bar had the best reputation!

But for the latest generation of 16 and 17 year olds, there is a much more fundamental question that comes before all the finer details of which course and where: can I afford to go?

No such thing as a free degree

Previous generations of school leavers were funded either partly or entirely by grants, meaning that other than realising you'd have to live frugally, the actual cost of your degree meant little. Nowadays, student loans mean the full cost of university is truly understood, and teenagers are balancing a value equation based on the relative merits of a degree/debt/job prospects.

But, whether a result of student loans being such a change in funding mechanism compared with their parents' generation, or because they don't function in the same way as other loans, there is considerable misunderstanding around student loans. As people struggle to come to terms with the details of student funding, many student loan myths are becoming entrenched.

So while it does now fall on graduates to pay back their student loans under the current framework, this doesn't kick in until they are earning more than £21,000 a year (if they never reach that income then they'll never have to pay it back) and then monthly repayments depend on their earnings. After 30 years the debt is written off, regardless of how much has been paid back.

"Student loans do not go on credit files."

First-time graduates' fees are paid by a Student Loans Company loan and then there are additional loans available of up to £5,500 a year for living allowances (this can be higher for those studying in London).

The worry is student loan myths will lead to bright and capable young people missing out on an educational opportunity, and recent dips in university applications suggests these myths are having an affect. But when the exact details of the loan repayment mechanism are understood, there should be less reason for this.

However, as anyone can see, it's pretty tough/impossible to live off £5,500 a year so students do have to work more during their studies and/or have parents willing and able to help.

Bank of mum and dad

The good news is that, according to research carried out by Family Investments*, 82% of parents still want their children to go to university. One thing that the introduction of student loans does seem to have done is spurred the majority into saving for this life event for their children. More than 80% said they planned to help them financially.

Respondents were then split in terms of what they were doing about it: half had savings set aside, half didn't. Just under half planned to contribute toward tuition fees and living expenses, with 27% saying that would be in the form of a regular allowance and 45% saying they'd contribute as and when it was needed.

Of those who said they were saving, the majority (69%) were using a child trust fund to save towards their children's university expenses followed by other savings accounts and children's ISAs. And they are generally starting early: 79% had been saving since their child was born with the majority (77%) doing so on a regular basis. To fund this, parents in the main said they'd cut back on their own savings or cut back on 'little luxuries'.

But how they save and how they help does need to be carefully considered. While additional support on top of the loans might be required, paying up front instead of their children taking out these loans is not necessarily financially-savvy, bearing in mind their children might not have to repay it all anyway. So, while it seems clear that supporting our children now extends well beyond their school leaving age, it pays for parents to do their research and make sure the money they have saved to help see their children through university, is used in the most financially-astute way.

* Research conducted by Family Investments in February 2013 from a panel of 3,900 customers where 581 responded to the survey.

Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. OneFamily do not provide advice so it may be worth speaking to an independent financial advisor about your own circumstances.