The media has been talking a lot about how students aren’t interested in taking a gap year because they see it as “time wasted”.
Covid, student debt and the desire to “get on with it” may well be impacting the tradition of taking a year out before uni and exploring the freedom and adventure of no responsibility offered by a gap year but I don’t think it’s the whole story.
While I’m a huge fan of the gap year having taken one myself and made lifelong friends and a lifetime of memories, changes to the student loan system may well mean that, especially this year, the financial cost of a gap year exceeds the benefits!
The student loan system is changing for the 2023/2024 cohort and the less favourable terms mean that you’d likely be better off taking a gap year after uni than prior to starting it.
There are three main changes coming:
When student debt will be wiped
Under the current system, any outstanding debt is written off after 30 years ie. 30 years after you start paying off your debt, any amount that still remains is cleared and you won’t owe any more money.
Under the new system, any outstanding debt will be written off after 40 years instead. That means you would likely be paying for your student loan up until, if not well into, retirement.
The repayment threshold
You don’t start repaying your student loan until you earn over a certain threshold, which currently is £27,295. So if you earn £27,300, you are earning £5 more than the threshold and so you pay 9% of that extra £5 – making your annual student loan repayment £0.45.
This threshold is due to drop to £25,000. That means that at £27,300 you are paying back 9% of £2,300 (£27,300-£25,000) which is £207 per year.
The interest rate applied to student loans
Currently interest rates are calculated on a sliding scale – the more you earn the higher the interest rate applied to your debt – from RPI to RPI+3%. RPI is a measure of inflation, so the higher inflation is, the higher the interest rate being applied to your debt.
Under the new regime, the interest is dependent only on the RPI. This is a positive change as it means the interest that will be applied will be lower under the new regime than under the old.
Because of the inflation rollercoaster we are currently riding, students and graduates in England could pay up to 12% interest on their loans (RPI+3%).
It is important to remember that monthly repayments are linked to income, and interest rates don’t play any part in the amount paid back each month. Students earning below the relevant repayment threshold make no repayments at all. That has not changed.
So should you take a gap year? While students starting their courses from 2023 will see a lower rate of interest, the lower income threshold and higher repayment period mean that delaying university by a year and taking a gap year before university might be an expensive decision. It is certainly not one to take lightly.
If you choose to not take a gap year then be sure to check out all the financial help for students that is available including student grants, education grants and scholarships. Get your hands on as much funding as you can in order to minimise your student debt and then maybe a post-gap-year will be in order!
