News has reached AYT that the government has plans to change the way that interest rates are charged on Student Loans. Now, we know financial stuff isn’t the most thrilling topic, and that the words ‘interest rates’ are enough to make you click away from the page (I feel the same!), but this could be hugely important, so do have a read:

When you take out a loan, you have to pay it back. The money is loaned to you. A grant, sponsorship or bursary you don’t. When you borrow money, it is on the assumption that the lender can earn money by doing so – they charge you a percentage of the amount of borrow in interest. This is money you have to pay back on top of the sum you borrow.

So, if you borrow £3,000 at the rate of 3% interest, the money you pay back will go up every year like this:

Year one: Money owed is £3,000. 3% of this is £90. So by the end of year one you owe £3,090.
Year two: Money owed is £3,090. 3% of THIS is £92.70. So by the end of year two you owe £3,182.70.
Year three: Money owed is £3,182.70. 3% of THIS is £95.48. So by the end of year three you owe £3,278.18.

This effectively means that whoever lent you the money has earned £278 from lending you the money. (It’s not quite as simple as that because money depreciates in value – inflation – but the basics are right.)

Now, if you are lent the money by a bank, then you are likely to be naturally suspicious and will be looking at much higher interest rates. However, what if the government is lending the money in the form of a student loan? And what if instead of charging interest linked to inflation (so that you pay back the same amount in cash terms as you borrowed and the government doesn’t LOSE money by loaning it to you), it decides to change the way loans are paid back so that you end up paying a rate linked to high street bank’s rates but capped at RPI (inflation)? This would put the current rate at about 8.5%.

The government’s plans are that:

  • Interest on your loan will be applied at inflation (RPI – Retail Price Index) plus 3% while you are studying, and up until the April after you leave university or college.
  • From the April after you leave university or college if you are earning below £21,000, interest will be applied at the rate of inflation.
  • For graduates earning between £21,000 and £41,000 interest will be applied between RPI and RPI + 3% on a gradual scale depending on income.
  • For graduates earning above £41,000, interest will be applied at RPI + 3%.

Let’s call it 8% for the sake of my poor maths skills, and do those sums again:

Year one: Money owed is £3,000. 8% of this is £240. So by the end of the year you owe £3,240.
Year two: Money owed is £3,240. 8% of this is £259.20. So by the end of the year you owe £3,499.20.
Year three: Money owed is £3,399.20. 8% of this is £279.94. So by the end of the year you owe £3,679.14.

This is an extra £679.14 that you now owe.

Now, consider two things. Firstly, you don’t start paying your money back until you start earning a certain wage (£15,000 for people graduating before top-up fees, £21,000 under the new system which starts in September) so you’re not going to be looking at the interest over three years. It’s likely that you won’t hit this threshold when you are working in arts for several years – let’s say five to be on the optimistic side. Another five year’s interest on top of the £3,679.14 that we already owe? We’re looking at an additional £2,405.86 in interest, taking the total to £5,405.86.

Depressed yet?

Secondly consider this: most student loans aren’t £3,000. Let’s assume, again for the sake of optimism, that your parents are able and willing to help you through university. Your fees are likely to be around £9,000 A YEAR, which is £27,000 for three years. £27,000. And that’s before your maintenance loan, for luxuries like rent, food and books, which is up to £5,500 if you live away from home and study outside London; up to £7,675 if you live away from home and study in London; and up to £4,375 if you live with your parents.

After one year, on 8% interest just on your tuition fee loan, you would owe £2,160 in interest. By the end of your third year you will owe £34,012.22. How long do you think it will take you to get a job (or jobs) that pay you more than £21,000 a year? One year after graduating? Then you start paying back £36,733.20. Three years after graduating? You now owe £42,845.61.

I’m going to stop now, as the numbers are getting too depressing, but the sums are at the end if you wish to work out how much you’ll owe after ten years or more.

To put this further in perspective: I pay my loan back at the rate of £15 a month. On the new rates, by (modest) loan is accruing interest of around £60 a month. So, every month that £15 disappears off my pay slip, I am paying back a quarter of the interest I owe, without ever touching the lump sum I borrowed. It just carries on getting bigger.

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ON A LOAN OF £3,000 at 8%

Year 4 (first year after graduating) Interest is £294.33 = £3,973.47 owed
Year 5 £317.88 = £4,291.35
Year 6 £343.31 = £4,634.66
Year 7 £370.77 = £5,005.43
Year 8 £400.43 = £5,405.86

ON A LOAN OF £27,000 at 8%

Year one £2,160 = £29,160
Year two £2,332.80 = £31,492.80
Year three £2,519.42 = £34,012.22
Year four £2,720.98 = £36,733.2 First year after graduating
Year five £2,938.66 = £39,671.86
Year six £3,173.75 = £42,845.61