Most people don’t understand how student loans work. This must change

May 15, 2019 by

Poor communication around the complicated student loan repayment system is leaving graduates confused

David Thompson –

Ask most people, whether they’re students, graduates or parents, how teaching at university is paid for and the response will be anything but clear.

Many will have heard that students graduate with “£50,000 of debt” and that their loans attract a high interest rate. You’d need to have really done your reading to know that student loans are subject to repayment thresholds, forgiveness periods and are “income-contingent”. A recent report suggested that just two-fifths of students think they properly understand how student finance works. The interest rate applied to your loan – RPI+0-3% – has no impact on the actual monthly payments you will make. Eighty-three percent of graduates will never repay their loans in full. This is an intentional feature of the system.

All clear? Hardly. This is mind-bending stuff, which is a problem. Widespread misunderstanding of student finance obscures the positive features of a loan system which is for the most part progressive and affordable, subsidising those who can least afford to pay. While the system may not be perfect, it has been designed deliberately to try and ensure any young person with the ability and desire can attend university, irrespective of their background. This is primarily because you only make repayments on anything you earn above £25,725, with the outstanding total written off after 30 years no matter how much, or how little, you have repaid. Higher earners contribute most.

So why does the government present student loans as akin to conventional debt, like a credit card or a bank loan, when they are in reality very different? At present, graduates are sent annual loan statements topped with a despairingly large number to repay and listing interest accrued each month, despite these figures usually having little bearing on the sum they’ll actually part with. Why?

There are few decent policies that have been so badly communicated as student loans. At the individual level, this means students and graduates are less equipped to make informed financial decisions. For instance, we’ve heard some graduates use inheritance or parental loans to pay off their loans prematurely, even though they may be in low-earning professions that make it unlikely they would ever pay off the total debt.

continue: Most people don’t understand how student loans work. This must change | David Thompson | Education | The Guardian

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