If you are a parent and your children are considering going to university then the cost of university and student loans can be a very big worry. When grants were available and fees were covered for every student, the costs were not so much of a worry, but now that they all have to be paid for, it is a concern for many people. However, there can be a misunderstanding as to the way student loans actually work and this is partly to do with the way it is portrayed in the media as well as the way that the government talk about it. This means that you may end up being a lot more concerned than necessary. It is worth making sure that you understand the basics of the loans so that you can make sure that your concerns are warranted.
It does not work like a normal loan
It is easy to think that it is very much like a normal loan when it is not. Most countries with a student loan scheme similar to the one in the UK do not call it a loan as it works very differently. Firstly it does not have to be repaid in full in certain circumstances. After thirty years the loan will be written off by the lender regardless of how much is owed. Repayments are variable and determined by income which means that it is affordable for the students repaying it. Repayments only start once income reaches a certain levels and is calculated on a sliding scale which means that as income goes up, you will repay more but if income drops you will pay less or none. This means that if you take time out of work for any reason or move a lower paid job or part-time working, you will not have to worry about making these repayments. This is because they are taken out within the tax code and this will change depending on how much you earn and what your status of work is.
Three quarters of students pay no interest
You only have to start repaying the loan once your income reaches a certain level. Many students graduate and start a job which is below this income, they may have breaks in their career as well and this means that many of them will not be making loan repayments all the time at the maximum amount. This means that they will not end up paying the full amount. As you pay off the balance owed first and then the interest, you will not repay any interest unless you pay back the full amount or almost the full amount. This means that any increases in interest rate will not be relevant to many graduates as they never pay it back anyway.
Loan amount is determined by parental income
It is worth knowing that the amount that is lent is determined by parental income in the same way that student grants used to be. All students are entitled to get a loan to cover the course fees but the maintenance fees which cover living expenses are calculated based on parental income and so those with better off parents will get less money. This means that those students from better off families are likely to need to top up their loan perhaps by working or getting their parents to help them out.
Repayments are determined by student income
Although the amount you borrow is determined by parents income, it is the graduates that are expected to make the repayments through their tax code. As mentioned before the amount they repay is determined by their income. This means that once they reach a certain income level they will start making repayments through their tax code and this will continue until the loan is paid off or until thirty years have passed and the loan is written off.
Thinking about your children going into debt can be a worry, but this is very different to a normal loan. It only has to be repaid when it can be afforded and it gets written off after thirty years so it may not be repaid fully. Parents with higher incomes may have to top up the loan, but they should be able to afford it or there may be time for the students to work while they are studying in order to be able to afford everything that they need.