Today we have a guest post from the fantastic Nicola from over at Savour The Pounds who is here to tell us all about why they decided to take out a student loan to become debt free!
For most people working to become debt free and living a debt free life, taking out student loans would be a big no. In fact many are working hard to pay off their student loans.
So why have I decided to go against the grain and take out Student loans?
Mostly it is because I do not consider them a debt because of how the UK student loan system works.
There are many scaremongering stories in the news of people leaving uni with £50k plus of student debt. However the total amount people owe is not really relevant in most cases, it has very little bearing on how much you will pay back. In fact it will only be the very highest earners that will even pay back the full amount borrowed.
Just last month the threshold for repayments increased from £21k up to £25k. What this means is that you only pay back 9% of your salary based on what you earn over the £25k. So if you earn £26k you pay 9% of £1k. Whatever is left after 30 years gets wiped.
This chart from Student Finance England shows the impact of student loans repayment in real money.
|Annual income before tax||Monthly salary||Monthly repayment|
|Up to £25,000||£2,083||£0|
What this means to me is that my degree at today’s prices is going to cost just under £18k. Based on my salary I will be paying back around £15 a month.
Over 30 years that means I will only pay back £5400. So while I will graduate with £18k worth of student loans, accruing interest along the way. I will not end up paying that much back so the total amount means nothing.
Of course, if my salary goes up then so would my repayments, but in the area and business I am in, and looking at jobs related to my degree I would never be earning enough that it would cause me to pay back the full amount borrowed.
However, if my salary dips below the £25k, if I need to reduce my hours or I lose my job for example, then repayments stop. Unlike a standard loan which would continue to require you to make payments which could then end up affecting your credit rating if you can’t pay.
So rather than viewing it as another debt, I view it as a tax. (It also gets deducted from your pay before tax and NI)
Now every person’s situation is different so it really is worth taking a look at the Student Finance England website (there is different criteria and sites for Wales and Scotland) if you are considering taking student loans. But for most people on an average wage you may be surprised at how little that degree will actually cost you in real money.
What if you are currently in a high salary role, or plan to be?
To give the opposite view, a family member went to uni straight from college. He left with about £60k of student loans. However he studied accountancy and straight after he graduated at age 21 landed himself a job at a very prestigious firm in London. So he has the chance to work hard, move up and earn a big salary.
This means that he could end up with much larger student loan repayments and over 30yrs he could well end up paying back the full £60k plus a hell of a lot more in interest.
So this makes it a very different scenario from my own. In that position, I would most definitely treat it like a debt and would be aiming to clear it as soon as I could to reduce the amount he would be paying extra as interest.
For myself £5400 for a degree that could get me into a field I would enjoy, and would also open more doors if I needed to look for a new job is well worth the cost.
Even for my family member. That £60k plus interest could still be worth every penny as without that degree he would be unlikely to have the opportunity to make such a large salary.