Student loans – normal debt rules do not apply

The issue of student loans weighs heavily on students and their families, and even political parties – remember the Lib Dems? But the name itself has created misunderstanding about how they operate and the best way to manage them.

A recent article published by debunks some of these common myths. Because normal debt rules don’t apply, a student loan should usually be taken instead of self-funding fees, and it is generally not worth trying to pay a loan off early.

This approach to student debt is, of course, the complete opposite to the approach towards normal debt, such as borrowing to buy furniture. The misconceptions surrounding student debt are because the amount borrowed to pay fees and living costs are largely irrelevant; what is important is how much has to be paid back. Also, in regard to student loans:

  • There are no debt collectors;
  • There are no entries on credit files; and
  • The impact on mortgage affordability checks is not the amount of debt but just the value of the repayments.


English and Welsh students don’t make any repayments until annual income exceeds £27,295, with repayment at the rate of 9% on the excess. So only those with reasonably well-paid jobs pay back the debt. After 30 years, any remaining debt is wiped out.

Anyone nearing retirement is in a very appealing position if they take out a student loan to study for a degree. Unless they will have substantial pension income, they will never have to repay.

Do not self-fund

Given the way student loans are repaid, self-funding university costs can be a bad idea. Self-funding means 100% of the costs are paid, but someone who earns less than £27,295 will effectively get their degree for free.

Even worse is where parents borrow to avoid taking out a student loan – it is much better to help out children later in life with a mortgage deposit.

Early repayment

Although it is usually a good idea to repay debt as quickly as possible, this may be a bad decision when it comes to a student loan.

Overpaying a student loan each month is pointless if that person will not fully repay the loan within 30 years. Even someone with a good income may not make full repayment given the relatively high rate of interest that can be charged.

Guidance on repaying student loans can be found here.

Photo by Honey Yanibel Minaya Cruz on Unsplash

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