The student finance system can be confusing. We’re here to break down eight myths that people often wrongly believe about the student loan system and tell you once and for all how student finance really works.
Student finance myth 1: UK student debt is the worst in the world
If you’re watching the horror of US student debt you may be worried when you see that the average student loan debt for a graduate in the UK is almost £50,000. But don’t let this throw you off.
In fact, our system is much more borrower-friendly. The US system is notorious for being very commercial and aggressive (student loans are the only loans that can’t be discharged – read cancelled – when you declare bankruptcy). Tuition fees in England are high but you pay nothing upfront, with the government fronting the money both for your education (the tuition fee loan paid directly to the university) and the maintenance loan you receive each term to pay for food, accommodation and the occasional cheeky takeaway.
When you graduate, these two loans are combined into a single figure and that, plus the interest applied, is what you owe.
But here’s another reason it’s different to the US. You don’t start making student loan repayments until you earn over a certain amount of money (currently £27,295 but dropping to £25,000 for those starting in September 2023). And after 30 years (40 years for those starting uni in September 2023), any leftover student loan debt is wiped out.
Student finance myth 2: It’s like a graduate tax
Yes and no. It is the same as a tax in the sense that money is taken out of your salary just like your income tax but it is “income-contingent”: you only start repaying your student loan once you earn over a certain amount of money (currently £27,295) – earn less and you don’t make payments.
More student debt does not mean higher monthly student loan repayment because everyone pays the same 9% of every pound earned OVER £27,295.
Let’s imagine you earn £27,300. This would mean you’re earning £5 more than the student loan repayment threshold and so you pay 9% of that extra £5, and NOT of the full £27,295. If your income changes, the amount you repay will change too. But don’t worry – this happens automatically.
The thing about tax is that everyone wants to pay less tax, but ask yourself: would you rather earn £100,000 and pay about £35,000 in tax or earn £12,000 and pay no tax at all?
If you graduate into a high-earning career and job you will pay back more of your student loan each month (still only 9% above the threshold) and likely pay off your full student debt.
| Yearly income before tax | Monthly income before tax | Monthly student loan repayment |
| £27,295 | £2,274 | £0 |
| £29,500 | £2,458 | £16 |
| £33,000 | £2,750 | £42 |
Student finance myth 3: Making extra payments to pay off your student loan early is a smart move
It might be for some but it’s not a good money move for most. Paying off faster and earlier will reduce the amount of interest applied to your student loan debt but unless you are certain you are in fact going to pay it off before it gets cleared by the government (after 30 years, or 40 for those starting in September 2023), you will likely benefit more from putting any spare cash somewhere else.
If you are not going to be a very high earner (earning £70,000 or more), by paying off more of your student loan than you are required to you may end up paying off money you wouldn’t have had to pay back otherwise.
Student finance myth 4: Student loan interest rates will stay the same
Unfortunately this is not at all true. Currently, the interest rate operates on a sliding scale from RPI to RPI+3% – the interest is higher the more you earn and the higher the RPI is.
This is changing for those entering uni in September 2023 when student loan interest will just be equal to the RPI.
So what is RPI? The Retail Price Index is one of the main measures of inflation and as we have seen in the last few months, inflation changes all the time and can change a lot. And at the moment and likely for the foreseeable future, it will be higher than we have seen in decades
Student finance myth 5: You start repaying your student loan as soon as you graduate
If you are on a full-time course, you start to repay your student loan the April after you finish or leave your course.
If you are on a part-time course, you start repaying the April after you finish or leave your course or the April four years after you start your course, whichever comes first.
In both scenarios, you only begin repaying if you’re earning over the student loan repayment threshold (currently £27,295).
If you never earn over the threshold, you’ll never pay off any of your student loan.
Student finance myth 6: Uni is only for rich kids
Because a lot of people don’t fully understand how the student loan system works, they believe the student loan is crippling. It’s not. The loan system in the UK is actually designed to take into account different levels of financial resources.
In fact, the government takes into account your household income when they give you a Maintenance Loan to cover your living costs. The less money you can tap into at home, the more you’ll get from the government (up to a limit!).
This larger maintenance loan means that students from lower-income backgrounds graduate with a larger loan, and therefore more debt, than those students who qualify for a lower maintenance amount, as their household income is lower. This higher student loan amount will mean more interest and an overall larger debt.
But remember, repayment terms are the same for everyone and you only start paying the loan back after you’re earning more than the student loan payback threshold and anything still owed will be wiped after 30 years.
Though there is a lot of financial help for students; student bursaries, student grants and educational grants – but it’s important to note that there is a certain assumption that your family or guardians will cover any shortfall.
Student finance myth 7: If you leave before you graduate, you don’t have to pay back the student loan
You start to repay your student loan the April after you leave your course, whether you graduate or leave before graduation.
Any money borrowed is money that needs to be paid back (if you earn over the repayment threshold… are you sensing a theme?) and for most students that means the first instalment of your maintenance loan that you receive in time for the new year as well as the student tuition fee loan that the government pays directly to the university on your behalf.
Think of it this way – you go to a restaurant intending to have a three-course meal but you leave after the starter and a cocktail. While the waiter isn’t going to chase you to pay for the main course and dessert you didn’t eat, you still get the bill for the starter and cocktail.
That isn’t to say that you should stay if you don’t want to (and that can be for any number of very good reasons).
Student finance myth 8: Your student debt will affect your credit score
Another way in which student loans are not quite normal debt is that they do not impact your credit score. Student loan debt doesn’t appear on your credit score and won’t impact your ability to get a phone contract while studying or a mortgage after graduation.
And while it won’t impact your credit score, your student debt will be considered when applying for a mortgage under “affordability checks”. This is when the mortgage provider needs to check that you can afford the mortgage you are applying for.
But because the loan is income-contingent and unlikely to represent a substantial part of your outgoings, it’s highly unlikely to impact your application in any meaningful way. Other debt like credit cards, Buy Now Pay Later and overdrafts will present bigger challenges when applying for a mortgage than will your student loan.
