Last month, shortly after my 36th birthday, I hit one of those elusive life milestones people talk about. It wasn’t one I’d ever dreamed about – not buying a house with a garden, getting married or having a child. No. I paid off my student loan.
When I applied to go to university in 2005, tuition fees were £3,000 a year. This was more money than I had ever contemplated having and yet taking on the debt was talked of as though it were merely a formality. “The interest is low,” teachers said, “I wouldn’t worry too much about it.”
It turns out that they weren’t quite right to be so casual about this form of borrowing. The interest rate on my loan was set at whichever of the Retail Prices Index (RPI) or Bank of England base rate was lower plus 3 per cent. So, in the past year or so, my debt has become more expensive, with the interest hitting 6.25 per cent last year.
That would have been worse for anyone who started university between 2012 and 2022. This year they will have been paying 7.6 per cent interest on what they borrowed, meaning that their loans likely went up by more than they will repay.
Because the interest rate on student loans is linked to inflation, our abrupt departure from the era of ultra-low rates since the pandemic means that taking on debt to fund higher education is not as predictable as it was when it was introduced. Today’s graduates will likely pay more interest for longer of their working lives and they will need to earn £57,000 before they start paying off any capital.
The economy has changed since coronavirus and the conversation around student loans needs to change too.
Depending on when you went to university, you will repay your loans once you start earning between £21,000 and £28,000. The more you earn, the more you pay back.
As my career expanded and my earnings increased, the way the loan repayments work has also meant that I’ve sacrificed more of my income before tax: for the last year I’ve said goodbye to almost £500 a month.
I was the first person in my family to go to university and everybody was more focused on that than on the bill I would get at the end, including me.
Even though I qualified for maintenance grants (which were scrapped by former chancellor George Osborne in 2016) and was given a bursary by my university because, at the time, my parents didn’t have much, I still ended up with £21,000 worth of tuition fees and maintenance loans before the interest kicked in.
Eighteen years later, it’s finally all gone. For the first time in my adult life, my full income after tax was paid into my bank account this month.
I already feel calmer and more secure. I can do so much with this money. My mortgage went up by £175 per month just under two years ago and, in October, it will go up again. Like you, all of my living costs are higher than they were before the pandemic. And, I really need to be saving properly for retirement.
I wasn’t expecting to feel so much relief, but I do. And I know that I’m one of the lucky ones for several reasons.
Firstly, I earn enough to pay off my student loan. According to the Student Loans Company (SLC), 1.5 million loan applications are processed each year and it’s thought that the majority of graduates will never repay what they borrowed.
Secondly, I went to university when tuition fees were £3,000. They are now £9,000 and graduates in England begin their working life with average debts of £44,940.
Finally, and perhaps most importantly, my degree changed my life. I do work that I love and have opportunities that continue to shock my family. I think it was worth it.
Sadly, I’m not sure future generations will be able to say the same. There is less support available to students from lower-income backgrounds now and higher education is much more expensive.
According to the Sutton Trust graduates who, like me, came from lower income backgrounds now graduate in higher debt than those from higher incomes because the maintenance grant has been scrapped. It’s now thought that around 83 per cent of graduates will never repay their debt.
The last government made some changes so that people who start university now will repay 9 per cent of everything earned above £25,000. Higher earning graduates will benefit because repaying more each year means they’ll pay off their loans quicker and pay back less interest overall. But that doesn’t help lower earners or people who took out loans under previous plans because, at the same time, the previous government lowered the repayment threshold and extended the length of time before a loan can be forgiven from 30 to 40 years.
Now that I have the money I was spending on my student debt in my bank account, it is clear to me that we should look at student loan repayments as a stealth graduate tax. Those who go on to make significant repayments are effectively taxed on their earnings three times – their income tax, national insurance and SLC payments are all deducted.
During the election campaign, Keir Starmer said he abandoned his pledge to abolish tuition fees to prioritise tackling NHS waiting lists. He insisted that he could not fulfil both pledges because of the state of the British economy.
However, the issue of tuition fees isn’t going anywhere. Universities need to be funded properly to function well and the question of who should pay for that – graduates or taxpayers – is an awkward one to broach with the public.
But, as the number of working, voting-age graduates with debt increases, the Prime Minister may find himself facing a growing constituency of people calling for change just as US President Joe Biden did. In the US, Biden approved debt relief for millions of graduates. That’s not the answer here in the UK because our system is much fairer. But reform is still necessary. Why not cap the amount that graduates can repay? Why not look at more grant funding?
Something has to change because, graduates like me end up repaying student debt in the middle of our lives, a point when we really need to be saving for retirement, paying down mortgages, and securing our futures.