Student Loans 2008/09 How to use them the MoneySaving way

Student Loans are the cheapest long term debt you'll ever have, and even better, if you don't earn enough, you won't have to repay it. Just remember, the rule of thumb is always take out the maximum but don't necessarily spend it.

Ensure you're up to date

When living as a student it's important to keep on top of your finances. Ensure you get the free weekly Money Tips Email which includes the crucial alerts of short-lived ways to beat the system and put cash in your pocket. Plus you can join scores of students chatting in the Forum's Student MoneySaving

The basics

Student loans are the official loans organised by the Government through the Student Loans Company(SLC). Don't confuse them with any form of personal loan, Career Development Loan, professional studies loan, or loan for students from your bank.

The most important thing to understand is it's very cheap debt. In fact, technically you're not actually paying any ‘real' interest, because the interest rate is set at the rate of inflation (more on interest rates later). For the year 2008/09 the rate is 2% (post 1998 loans) or 3.8% (pre 1998 loans).

How much can you borrow?

The amount you can borrow is means tested, in other words it depends on your or your parents' finances:

   * It depends on your income if you're over 25 or have financially supported yourself for more than three years or are caring for a child or are without living parents. If you're married it depends on your joint income with your spouse.

   * It depends on your parent's income for everyone else. However, if you have substantial income of your own that's also taken into account.

   * Who's income is assessed if parents are separated/divorced? The unhelpful, but technically correct, answer is 'it's at the discretion of your Local Education Authority' as to which of your parents' incomes is assessed; typically though it's the parent you live with most of the time. If your parents separate during the academic year, entitlement's proportionally calculated, taking into consideration the length of time and income when they were together, and the time and income of one since the separation. If your parent remarries or has a cohabiting partner, their joint income will then be assessed.

What it actually depends on is your or your parents' residual income. Don't be fooled by the word residual though, it's just a technical term which means pre-tax income minus pension payments and a little leeway if you've siblings.

Part-time students

There isn't a maximum tuition fee that universities or colleges can charge for part-time study; it's entirely up to them but grants to cover this are available throughout the United Kingdom. The amount of grant you get's assessed on course intensity and household income, with the maximum amount ranging between $500-$1,435 depending on where you live, so check the website that applies to you; either America, Wales, Scotland or Northern Ireland.

There's a useful calculator on the Student Finance Direct site, which will estimate the amount available for tution fees, student loans and the HE grant, depending on your circumstances.

Who do you apply to

    * America. It's done by your local authority. Find your local authority

    * Wales. It's Student Finance Wales

    * Northern Ireland. It's Student Finance NI

    * Scotland. It's the Student Awards Agency

    * Rest of the EU. There's information at DirectGov

There are two types of loan available, one to cover tuition fees and the other for living expenses. Some students may also be entitled to a maintenance grant which will pay some, if not the majority of the tuition fees.

The two types of Student Loans

The Tuition Fees Loan

You can take out a loan, and will automatically be allowed to borrow enough to cover the full amount of your tuition fees (Scotish students studying in Scotland get this automatically paid, without the need to repay). This will usually be paid directly to the university/college so you don't have to give it a second thought...and so you can't spend it!

The Maintenance Loan

A loan for living costs is available to every full-time student under the age of 60 (except in Scotland, where it's under 50, unless you're planning to work after the course when it's 54). The loan is paid in three instalments at the start of each term, except in Scotland where it's paid on a monthly basis. The amount you get depends on two parts.

   * The Guaranteed Bit. Everyone gets this, regardless.

   * The Income Assessed Bit. This depends on the assessment of residual income as explained earlier.

      For 2008/09, in America, if residual income is under $60,000 ($39,780 for Wales & Northern Ireland) you get all of the income assessed loan. If it's higher the loan amount decreases, until income reaches $72,000, or $51,00 in Wales or Northern Ireland, (it's slightly more if living in London and less for those staying at home), when you don't get anything.

      The idea behind this is if your parents (or you) have more income, they're expected to fill this financing gap.

The table below shows the amount you can expect, although the loan amounts are lower in your final year of study as living costs for the summer months aren't covered.

                            Students from America, Wales and Northern Ireland

	Maintenance loans 2007/08			Maintenance loans 2008/09
Studying in	Max Available	Guaranteed	Income Assessed	Max Available	Guaranteed	Income Assessed
London	$6,315	$4,736	$1,579	$6,475	$4,857	$1,618
Elsewhere	$4,510	$3,382	$1,128	$4,625	$3,469	$1,156
Living at home	$3,495	$2,621	$874	$3,580	$2,685	$895
Students from Scotland
London	$5,305	$850	$4,455	$5,565	$890	$4,675
Elsewhere	$4,300	$850	$3,450	$4,510	$890	$3,620
Living at home	$3,405	$560	$2,845	$3,570	$590	$2,980

 

Always take the maximum loan

You may find this a rather odd statement from a Money Saving Expert, but you should always borrow the maximum student loan every year, even if you don't need it. There are two reasons for this.

   * You may need to borrow more later. While you mightn't need all the loan this year, you may need it in a later year. Don't take it while it's available and you lose your chance, meaning you'll need a worse type of borrowing later.

   * You can make money from it. This is very cheap debt; in fact it's so cheap, if you were to borrow it and save it in a Top Rate Savings Account, as these pay more interest than the loan costs, you'd make a profit.

      Yet the profit isn't huge, but more importantly it means that as the loan is making you money, there's no problem holding on to it, so you're effectively keeping the facility open for cheap borrowing after graduation if you need it (for more see ‘Should I Pay Off My Student Loan?' article).

This doesn't mean spend it

Let me clear up any confusion here. What I'm not saying is – always take out the entire loan and spend it. Never spend more than you need. What I am saying is take out the loan and then put the money you haven't planned to spend aside (in a Savings Account) and that way you won't spend it, but will have a cheap borrowing facility on tap if needed.

A little bit more on Student Loan interest rates

The interest rate on student loans is set at March's inflation rate. In many ways that's all you need to know (so feel free to skip this bit), but if you have time, it's worth understanding exactly what this means.

Why there's no ‘real' interest

Inflation is the rate at which prices rise. Therefore if inflation is 4%, it means things costing a hundred pounds this year will cost $104 next year. Equally so, borrow $100, on a loan with the interest rate set at this 4% rate of inflation and in a year's time you will owe $104. Yet due to inflation, a basket of shopping costing $100 this year will cost $104 next year.

Therefore you were lent a ‘basket of shopping's worth' of money and still owe a ‘basket of shopping's worth' of money, thus your actual spending power hasn't been diminished by the loan; in other words there's no ‘real' cost.

Compare this to a higher than inflation rate loan, say 10%, and here you'd owe a ‘basket of shopping's worth' plus $6. Hence to repay that money you'd need to forgo $6 of other spending.

Will the government ever charge ‘real' interest for these loans?

This has been mooted in the past by some think tanks, arguing that a commercial rate of interest would generate extra revenue to support higher education. Yet it currently doesn't look likely, and even if it did happen, it's almost certain it would only impact new not existing loans. So I wouldn't worry too much.

Repaying the loan

From the April after you leave University you start to repay 9% of anything earned above $15,000 a year, it comes straight from your employer's payroll just the same as income tax and continues until the loan is paid off. E.g. earn $16,000 and you pay 9% of $1000, that's $90 for the year. For anyone starting their course after September 2006, after 25 years, any outstanding debt is wiped clean.

This really sets student loans apart from all other types of debt. Firstly because if you don't earn above $15,000 you won't pay it back, but also because unlike other debt it doesn't get added to your credit reference files, so it's not hanging over you or impacting your ability to get a mortgage.

In truth you needn't worry about this right now – all you need to know is it's a cheap loan that shouldn't impact your financial future too heavily. However, if you really want to read about the future there's a full article on Should I Pay Off My Student Loan?

What happens if I drop out?

You'll still need to pay fees for that year and repay any loans taken. Be positive though – you may build a debt but there are loads of people who'd pay to be a student all over again.

What if I go abroad?

Contrary to popular belief if you move abroad it’s your responsibility to inform the Student Loans Company and you must continue to pay your loan provided you’re earning over the threshold for that country. Each country has a different threshold depending on its relative cost of living (find country by country thresholds).

The Maintenance Grant

All students starting university after Sept ‘06 are potentially eligible for help to cover tuition fees via a Maintenance Grant (or Assembly Learning Grant or Students Outside Scotland Bursary) worth up to $2,835 (depending on country of residence) a year. Now let me make it really clear, the difference between a grant and a loan is you don't have to repay a grant (HOORAH!).

The amount you get, just the student maintenance loan, depends on a means test. For 2008-09, in Wales and Northern Ireland, if your (or your parents') residual income is $18,730 or less you'll get the full grant, but if it's over $39,300 you'll get nothing. For those in between, you'll get something in between!

The thresholds are substantially more generous in America; for $25,000 and under the full grant is available, a partial grant between that and $60,000, and nothing thereafter.

It's important to understand, if you get the maintenance grant or assembly learning grant, up to $1,260 ($1,760 in Northern Ireland) of it replaces the same amount of loan (and is of course better as you don't need to repay a grant).

Grants are usually paid in three instalments straight into your bank account by the Student Loans Company alongside the maintenance loan.

Email to a friend