There are many people out there that have done a degree using a student loan and are repaying it or have fully repaid it, but there are still lots of people that are really worried about getting a loan like this. Partly to blame is the media who portray the loan in a much scarier way than it should be and this leads to a misunderstanding of how it works. However, it is right to be cautious in some circumstances.
How does a student loan work?
A student loan is split into two parts. Any undergraduate that has not previously had a loan or student grant is able to borrow the money to cover the cost of their university course. If they come form a low income family they can also borrow enough to cover their living expenses and everyone is entitled to some money towards this but those from wealthier families will not get so much. This means that all students are entitled to some sort of a loan.
The loan will only need to be repaid once the student graduates and is earning over a certain amount of money. This amount changes with inflation normally and the amount they repair is taken out through tax in their tax code. This means that if they are a low earner they pay back nothing but if they earn a lot they will make small repayments on the loan. These repayments are made over 30 years and after that time any loan that is still outstanding is written off. These rules could change, as they have done over the years, but at time of writing that is how things work.
Should I get one?
This means that a student loan is low risk. Not only are repayments affordable but you may not even have to make them if your earnings are low. It also does not show on your credit report and so does not matter when you are being judged for other loans.
However, it is still worth contemplating a few things. Firstly, you will only get one loan. This means that it is important to be really sure that you are happy with the course that you have chosen. If you change your mind and want a degree in another subject, you will need to pay for it yourself and will have very different lending options. There is a chance of a loan still with repayments only starting when the course ends but the interest is likely to be higher and you will have to repay all of it. So choose really carefully.
There is also a thought that because students are now paying for courses, they should be more careful about what they choose. There has been a move towards courses that lead to specific careers rather than courses in things like the arts where careers are less obvious. This should not really be a factor though because as long as the course leads towards a career that they want to do it doesn’t matter what they study and only having one chance at a course was true when there were student grants rather than loans so nothing has changed there. Obviously, it is still worth having a good think about what you want to do but do not stress out too much over it.
It is good to think about how you might feel about a loan though. Some people get really stressed about being in debt. When they get their student loan letter which tells them how much they owe, they can feel anxious about where they will find all of that money form. It is easy to forget that they will not even have to repay it all necessarily. In fact, only 25% of students repay all of their student loans anyway. Another worry can be increases in interest rates but this will only impact those that repay the whole loan as they will also repay the interest. Those that do not repay it all will probably not even repay what they borrowed let alone the interest. So, it can be good to try to reassure yourself that it is not something to get stressed about. However, you will know what you are like and whether it is likely to have a negative impact on you or whether it is something that you will be able to easily manage.
Often parents will worry about their children entering the workforce with a debt behind them already. However, if you think of it as a graduate tax scheme rather than a loan, where graduates are taxed extra to pay back the cost of their degree, if they can afford it, then it does not seem so scary. There is also no evidence to suggest that if someone has a student loan that they are any more likely to struggle with debt in later life.