- With A-Level results day tomorrow, many prospective university students will be thinking about their student finances
- Repayment system has a lower interest rate but now comes with 40 years before the debt is wiped out, benefitting the highest earning graduates
- Students in England currently start to repay when they earn over £25,000 a year, or £2,083 a month
- Highest average earnings five years after graduation go to those sitting medicine and dentistry courses, with economics taking second place
- Budgeting can help your cash go further at university
Laura Suter, director of personal finance at AJ Bell, comments:
“A-Level results week is upon us and firmly in the minds of many students and their parents as they contemplate their next steps. But those who decide to go to university in September should consider the impact of student loans on their longer-term finances, as well as how they can prepare for more financial independence as they pull away from the Bank of Mum and Dad.
“While budgeting might not be at the top of the list for those excited to celebrate their A-level results, the cost-of-living crisis has heaped extra pressure onto the financial constraints university students already face. Thinking about how you’ll make your money last will save you stress further down the line, and hopefully mean you make the most of your studies and the whole university experience.
What is a student loan?
“A student loan has two parts – tuition fees and living costs. Interest is charged from day one at the same rate as the Retail Prices Index (RPI) measure of inflation.
Source: AJ Bell/Department for Education. *Your family income is taken into account (including step-parents) even if they aren’t helping you out financially.
When is it paid back?
“Students in England currently start to repay their loan when they earn over £25,000 a year, or £2,083 a month. Although this threshold is currently frozen until 2027, the government could choose to increase it from then on – which is when this year’s freshers will graduate from three-year courses. Repayments are taken at a rate of 9% of income above the threshold, regardless of how much you end up owing, which is why it’s often referred to as a graduate tax.
Examples:
“Based on a debt at graduation of £51,361, a graduate earning £40,000 a year would hand over £1,350 in their first year of repayment. They’d be a basic rate taxpayer (20%), meaning their marginal rate of tax could be effectively 29%, based on the current tax rates and thresholds, which are due to remain frozen until at least 2028. Including national insurance, the marginal rates of tax would be 37% on their top slice of earnings.
“Someone starting out earning £52,000 would hand over £2,430 in their first year of repayment. They’d already just break into higher rate tax (40%) on their top slice of earnings, meaning their marginal rate of tax could be effectively 49%, based on the current tax rates and thresholds. Including national insurance at 3% on earnings over £50,270, their marginal rate of tax would be 51% on their top slice of earnings.
“Contrast that with someone starting on a much lower salary of £30,000. They’d have the same marginal rate of tax as our £40,000 starter. But assuming they don’t see huge jumps in wage growth during their lifetime they’d likely have their debt written off after 40 years having paid back a total of around £77,600 in that time, leaving taxpayers footing what could be an outstanding £75,000 bill.”
How to budget for university
“Work out what your crucial expenses are, including things like rent, study materials, utilities and food that you can’t go without. It’s also worth checking whether you are covered by your parent’s home insurance for contents and possessions.
“Once you've totalled them all up you can deduct that amount from the sum of money you’ve got to work with, which could come from your loan, grants, earnings or gifts from family.
“For students it will often make sense to break things down term by term and then set out a weekly budget with spending limits. That allows you to keep track – if you overspend a little one week you can cut back slightly the next.
“Hopefully after doing this you should then have a clearer picture of what is left for the fun stuff, like going out, buying new clothes and shoes, and hobbies and interests.
Tools to help
“There are loads of different apps and resources online, so you don't have to build your own spreadsheet from scratch unless you really want to. Mobile apps are a great way if you’d like something to hand that you can regularly check in with. Banking apps also let you group spending into different categories or have different pots where you can put away a little amount or round up your spending each week.
“There are also some great online budget planners aimed at students too – one of the best is from Save the Student, but UCAS also has some great resources on budgeting and how to keep things realistic.
Sticking to it
“You've made a budget, so the next job is keeping to it. The best way to do this is check in regularly to see how you're getting on and act if necessary. Having a realistic plan at the start means you're less likely to overspend - another step towards helping your money last.
“Many student bank accounts will come with an overdraft, usually interest free up to a certain limit. While it’s really tempting to think of this as free money or part of your income, it isn’t your money and should only be called upon in emergencies if you can help it.
“The same goes for credit cards or Buy Now Pay Later. Promotional offers might help you spread the cost of one-off items like a laptop, and give you protection on the purchase, but interest and fees can escalate very quickly.
“If you do find yourself borrowing to get through then the key thing is to make sure you have a plan to pay off the debt. That could come from a summer job or getting a job at university, for example.
Working while studying? Keep an eye on tax
“Although a temporary job might earn you less than the tax-free personal allowance of £12,570 each tax year (6 April to 5 April the next year), you might get a shock when you look at your payslip and still see income tax deducted.
“That’s because the system used to tax employees (PAYE, or pay as you earn) will assume that someone working a chunk of hours over Christmas or during other holidays will be earning that amount regularly and tax it accordingly. You should make sure you claim this back – see the government website for more details on how to claim. If you are earning a small amount each week throughout the year, there’s less chance you’ll be overtaxed, but it’s still worth double checking.”
