Guide discussion: Plan 5 student loans

LL_USS

silvercar said:

LL_USS said:

My son is going to university this September. He has applied for student loan and we are aiming to borrow maximum amount allowed. Anything I save now for him, instead of paying for university costs, will go to a fund to help him with housing after uni. He will need to manage housing no matter what, whilst paying back the student loan is dependable on income (so yes it is just like paying graduation tax/ contribution).

I am still wondering how we normally manage the timing of student loan versus renting payment. My son starts in early September, meaning he should be in the hall from 1 Sep, paying perhaps before, but the first maintenance loan goes to his account on 9 Sep. And we may need to pay half a year in advance, which is higher than the first installment of the loan. Anyone has experience or idea how to manage this? Do parents pay the half year rent, then the student pays back when they receive the loan? We aim for the maintenance loan to cover rent plus travel, books, emergencies. I as parent to up by paying for food shopping each week.

If this is university owned student halls, I would expect that the payments tie in with the loan dates. As many, many students wouldn’t be able to make the payments otherwise. 

Yes it is university hall. I hope so. Otheweise I'll use my credit card and ask him to pay back once receiving his maintenance loan :-:smile:

LL_USS

@everyone

I have taken out a student loan for my kid for uni. The interest rate for Plan 5 student loan this year has been confirmed as 4.3% (it was about 7.5% last year, the first year of plan 5).

I am wondering if it's that straightforward regarding Martin Lewis's explanation that because the interest rate for student loan plan 5 is RPI, it is like borrowing 1000 trolleys' worth of food, when you pay it back, it is still 1000 trolleys' worth (just higher in absolute money amount due to the delay in time so inflation factors in). Many of my colleagues argue in the same way that when the interest rate is RPI only, it is effectively interest free. Meanwhile, some other friends of mine, who work for banks, say that they disagree with Martin Lewis, student loan repayment should not be considered as "tax" (graduation tax) because you don't pay during the 3-4 years on the uni course, then only pay a part of the loan after having a job, that means interests keep on being accrued and the loan is going to be inflated to a big one very soon. Any thought?

silvercar

"I have taken out a student loan for my kid for uni. "

More correctly, your kid has taken out a student loan. This loan belongs to your offspring, not you. 

The answer is probably a hybrid of the 2 views. Borrowing at RPI means the food trolley analogy works. It is true that interest is added to the loan before payback starts, so there will be a larger loan when payback starts, but repayments are linked to income rather than the size of the loan, so some people will pay back quicker than others and therefore have less interest charged, others will have their loan written off after 40 years (and have therefore paid rather less for it), the middle group will have paid more in interest than if they had started repayments earlier. That's life and without a crystal ball it is hard to tell which group an individual falls into.

To some extent, it doesn't really matter....for most people if they want to go to university, that means taking the loan. If a parent can afford to pay the costs of maintenance and tuition fees they could do that - but it may make more sense to use the money for a house deposit or a pension.

LL_USS

@silvercar sorry it was my mistake. Indeed, my son has taken out the student loan, not I.

It is clear that repayment is linked to income. That's the beauty of this type of loan.

My question was totally just from curiosity. When you mentioned "interest is added to the loan before paying back and so the loan will be bigger" - I was wondering if it's bigger purely because of inflation or because of both inflation and the actual "interest" (which means it is not really interest free as some people say - for e.g. the "intereest free" argument is that though it is 4.3% RPI this year, when you borrow 1000£ at the end of the year the loan should be £1,043 anyway because of inflation, so effectively the value of the loan is still the same, it is just a bit bigger because of the inflation but you don't have an actual interest on it. Sorry I am still not sure about this.

silvercar

LL_USS said:

@silvercar sorry it was my mistake. Indeed, my son has taken out the student loan, not I.

It is clear that repayment is linked to income. That's the beauty of this type of loan.

My question was totally just from curiosity. When you mentioned "interest is added to the loan before paying back and so the loan will be bigger" - I was wondering if it's bigger purely because of inflation or because of both inflation and the actual "interest" (which means it is not really interest free as some people say - for e.g. the "intereest free" argument is that though it is 4.3% RPI this year, when you borrow 1000£ at the end of the year the loan should be £1,043 anyway because of inflation, so effectively the value of the loan is still the same, it is just a bit bigger because of the inflation but you don't have an actual interest on it. Sorry I am still not sure about this.

The interest rate charged is RPI or a lower cap. (https://www.gov.uk/guidance/how-interest-is-calculated-plan-5 )

So the basket of goods case still applies, whether or not the loan is in the pay back period or not.

There seems to be a disconnect at the moment between 2 government webpages, the link I put above has a rate of 8% a couple of months ago, whereas this link https://www.gov.uk/repaying-your-student-loan/what-you-pay has 4.3%. I’m not sure which is right.

(Plan 2 loans interest rates increase by how much you are earning once they go into payback, so then you can be charged more than RPI - subject to the cap)

LL_USS

silvercar said:

LL_USS said:

@silvercar sorry it was my mistake. Indeed, my son has taken out the student loan, not I.

It is clear that repayment is linked to income. That's the beauty of this type of loan.

My question was totally just from curiosity. When you mentioned "interest is added to the loan before paying back and so the loan will be bigger" - I was wondering if it's bigger purely because of inflation or because of both inflation and the actual "interest" (which means it is not really interest free as some people say - for e.g. the "intereest free" argument is that though it is 4.3% RPI this year, when you borrow 1000£ at the end of the year the loan should be £1,043 anyway because of inflation, so effectively the value of the loan is still the same, it is just a bit bigger because of the inflation but you don't have an actual interest on it. Sorry I am still not sure about this.

The interest rate charged is RPI or a lower cap. (https://www.gov.uk/guidance/how-interest-is-calculated-plan-5 )

So the basket of goods case still applies, whether or not the loan is in the pay back period or not.

There seems to be a disconnect at the moment between 2 government webpages, the link I put above has a rate of 8% a couple of months ago, whereas this link https://www.gov.uk/repaying-your-student-loan/what-you-pay has 4.3%. I’m not sure which is right.

(Plan 2 loans interest rates increase by how much you are earning once they go into payback, so then you can be charged more than RPI - subject to the cap)

Thank you @silvercar. I did check the government website you gave (the rate there of 8% is for August 2024). This is a news item on the announcement of this academic year's rate from 1 Sep (confirmed as 4.3%): https://www.gov.uk/government/news/student-loans-interest-rates-and-repayment-threshold-announcement--5?

It is good to know that that basket of goods analogy is confirmed. Thanks again.

silvercar

I’m surprised that the interest rate, which is linked to RPI, can drop from 8% to 4.3% in one month! 

Ed-1

silvercar said:

I’m surprised that the interest rate, which is linked to RPI, can drop from 8% to 4.3% in one month! 

RPI dropped from 13.5% to 4.3% over the year to March.

silvercar

Ed-1 said:

silvercar said:

I’m surprised that the interest rate, which is linked to RPI, can drop from 8% to 4.3% in one month! 

RPI dropped from 13.5% to 4.3% over the year to March.

So why does this link show an interest rate of 7.7% for March? https://www.gov.uk/guidance/how-interest-is-calculated-plan-5

LL_USS

silvercar said:

Ed-1 said:

silvercar said:

I’m surprised that the interest rate, which is linked to RPI, can drop from 8% to 4.3% in one month! 

RPI dropped from 13.5% to 4.3% over the year to March.

So why does this link show an interest rate of 7.7% for March? https://www.gov.uk/guidance/how-interest-is-calculated-plan-5

I do not know how last year we had the rate month by month and this time round it is a rate announced for the whole academic year.