Kia: It's Kia, this is A Little Bit Richer. And today
Kia: I'm taking a deep dive into the world of student
Kia: loans. Student loans are one of those things that it's so
Kia: easy to just take a passive approach to. You go
Kia: to uni, you get the loan, your repayments start, and
Kia: you more or less forget about it. But this podcast
Kia: is all about taking back control of all of your finances. And
Kia: the first step to getting that control is to understand
Kia: it. With me today, to help us get to grips
Kia: with all this, is Abigail Foster. Abigail is a chartered
Kia: accountant and she's a founder of Elent, a financial education
Kia: hub for students, employees, and parents. As part of this,
Kia: she runs workshops all about student loans, so I knew
Kia: I had to get her on to learn more. Abigail,
Kia: people listening to this can have all sorts of different
Kia: student loan repayment plans. It's changed a lot. So let's
Kia: begin. Could you talk me through all the different plans?
Abigail Foster: Okay. Yes, there's been many different plans. We'll talk about
Abigail Foster: the undergrad modern plans, so one, two, and five. So
Abigail Foster: one was if you went to university pre- 2012, I
Abigail Foster: think it was post- 1998, but pre- 2012, you would've
Abigail Foster: been paying the tuition loan at about 3K, very, very
Abigail Foster: nice amount of money, I wish I'd paid that. Then
Abigail Foster: you had plan two, which came in from 2012. So
Abigail Foster: any students that went to university from 2012 to 2023,
Abigail Foster: you were on plan two. And then any university student
Abigail Foster: that goes to university from this year, so from 2023
Abigail Foster: onwards, they are now on plan five.
Kia: Wow. Okay. So how do all of these loans work?
Kia: I mean, if you think about a loan, we think
Kia: about interest rates, right? So you might take out a
Kia: credit card at a certain amount of interest rate and
Kia: you now what you're going to pay. Is that the same when
Kia: it comes to student loans?
Abigail Foster: The interest rates on all three plans frustratingly all different.
Abigail Foster: Like to make it nice and complicated. So plan one
Abigail Foster: is either RPI, which stands for Retail Price Index, better
Abigail Foster: known as inflation; or the Bank of England base rate
Abigail Foster: plus 1%. So often what's happened with plan one is
Abigail Foster: the interest rate has been lower because it's that Bank
Abigail Foster: of England base rate plus 1%. Then for plan two,
Abigail Foster: they had the interest rate set at RPI plus 3%,
Abigail Foster: so Retail Price Index also known as inflation plus 3%.
Abigail Foster: So when inflation got crazy high last year and we
Abigail Foster: saw those 11. 9% numbers of inflation, we saw huge
Abigail Foster: interest on the student loans. Plan five, they decided as
Abigail Foster: their nicety for changing the plan, was they basically introduced
Abigail Foster: interest and cut it back to just RPI, so just inflation.
Abigail Foster: So there is a common misconception that the loan doesn't
Abigail Foster: increase over time, but that's not really true because it
Abigail Foster: does, it does increase by RPI. But they then assume
Abigail Foster: that that RPI means it's just increased with inflation therefore
Abigail Foster: the real value of the loan hasn't increased, but it
Abigail Foster: definitely does increase over time.
Kia: Okay. That's good to know that. So we need to
Kia: have a look and see, depending on what plan you're on,
Kia: that depends on what interest rate you are obviously going to have
Kia: on your student loan. So when it comes to repaying
Kia: then, because I know when I was in university not
Kia: too long ago, I know I've still got my baby
Kia: face, not too long ago, but when I was in university it was
Kia: always this thing where I had friends say, " I've taken
Kia: out X amount, now I'm going to have to pay it straight
Kia: away." I've graduated and it's almost like the next day
Kia: after graduation you're going to have to pay it back. But I
Kia: want to ask you, what salary do you normally have
Kia: to be on before you start paying off your student loan?
Abigail Foster: Okay, with the student loan, again, let's go through one,
Abigail Foster: two, and five. So with plan one you have to
Abigail Foster: be earning over £22, 015, if we're getting specific. With plan
Abigail Foster: two, it's 27,295. And then with the new plan five,
Abigail Foster: you need to earn more than 25 grand a year.
Abigail Foster: So this is your yearly salary. So let's say you are
Abigail Foster: on 25K, then you wouldn't pay anything back on this
Abigail Foster: new plan yet until you earn over 25K. So, you only
Abigail Foster: pay back 9% over those thresholds. Something to be careful
Abigail Foster: though is that what tends to happen is they'll take
Abigail Foster: your yearly salary, divide it by 12 and then look
Abigail Foster: at your monthly payslip. So if you don't always earn
Abigail Foster: the same every month, you might be overpaying the student loan.
Abigail Foster: And that's something to look out for because it's worked
Abigail Foster: out on a yearly basis, but on your payslip can
Abigail Foster: often be then brought back to that monthly amount. So yeah.
Kia: That makes sense. I think it's good to know that. I've seen
Kia: people online have decided to take control of their student loans
Kia: and log in and see if they're overpaying and have
Kia: been able to actually make those claims back. But I
Kia: just want to kind of go back to what you
Kia: said. So when you earn over a certain threshold, you
Kia: mentioned it's any income over that. I think people sometimes
Kia: get confused if it's, like you said, the new plan, it's
Kia: when you earn over £25, 000, some people think that they're going to pay back 9%
Kia: of everything, but it's only the income over, right?
Abigail Foster: It is only the income over the threshold across all
Abigail Foster: the plans. So if you are earning 30K, you are
Abigail Foster: paying 9%, on that plan five, you're paying 9% on
Abigail Foster: 5K. So the difference between your 30,000 salary and that
Abigail Foster: 25K threshold, 9% on that. But it does add up.
Abigail Foster: Obviously the more you start earning, that 9% is quite
Abigail Foster: a large chunk, which is why we commonly call it
Abigail Foster: a university tax as opposed to a loan because you
Abigail Foster: pay more the more you earn.
Kia: Yeah, absolutely. But I think yeah, that was good for you to
Kia: explain that because I think sometimes ... I know I've spoken
Kia: to people who have almost avoided taking out, especially maintenance
Kia: loans, and that's obviously the loan when you're in university
Kia: that will help you live. And I used that because
Kia: I moved away from home. And have avoided taking out
Kia: more money because they're like, " No, it's a loan and I've got to pay it back
Kia: and I don't want to graduate and have to pay
Kia: it all back. Let me just live within my means
Kia: and maybe make it harder for myself." But I think,
Kia: yeah, the way you explained it that definitely does help. We
Kia: mentioned student loan. Now that operative word loan, will that
Kia: affect people's ability in the future when it comes to
Kia: getting a mortgage or any other type of loan having
Kia: a student loan out?
Abigail Foster: It can do, so especially with a mortgage because there
Abigail Foster: is a rule which is that the student loan doesn't
Abigail Foster: impact your credit score, which then commonly misconstrued as therefore
Abigail Foster: it doesn't impact your mortgage. That's not true. So it
Abigail Foster: doesn't impact your credit score in the terms it doesn't
Abigail Foster: get ... it's not information that filters into your credit rating
Abigail Foster: agencies, which then provide you with a credit score. But
Abigail Foster: it can affect how much mortgage you get. Because if
Abigail Foster: you went to a mortgage provider or you went to
Abigail Foster: a mortgage advisor, et cetera and said, " Right, this is
Abigail Foster: my income." They would say to you, " Okay, what are your outgoings?"
Abigail Foster: And they will look at your outgoings, one being your
Abigail Foster: student loan. So if you are earning over that threshold and
Abigail Foster: you've got quite a large chunk coming out for student
Abigail Foster: loans, that can affect how much you can borrow. So
Abigail Foster: that's where it can affect your mortgage. There is discussions
Abigail Foster: around if it can stop you getting a mortgage, it
Abigail Foster: shouldn't be able to stop you, it's not like a bad
Abigail Foster: note on your credit score. It is just something to
Abigail Foster: be aware of that it can reduce how much mortgage you
Abigail Foster: can get.
Kia: I think that's good to know. So it is just part
Kia: of the affordability checks that the mortgage providers do. It
Kia: is part of what are you paying, what are your outgoings, and
Kia: that's just one of them if you don't earn over
Kia: that. I think that's good to know. Now there's a
Kia: big question, and one I know a lot of people
Kia: want to know, should we, as in former students who've
Kia: now graduated, should we prioritize paying off our student loans
Kia: or should we just carry on as we are?
Abigail Foster: When it comes to paying off your student loan, you
Abigail Foster: need to put yourself in one of two camps. So
Abigail Foster: one, if you are not earning enough that you are
Abigail Foster: noticing it on your payslip, leave it. Just leave it
Abigail Foster: be. Because once you pay off that student loan, if
Abigail Foster: you've voluntarily chosen to, you can't go back to the Student
Abigail Foster: Loans Company and get that money back. And that money
Abigail Foster: is gone. So whilst you might be taking down the
Abigail Foster: loans, but you will end up with less money. And
Abigail Foster: obviously less money in your pocket, which you could have
Abigail Foster: used for better things. If you fall into the other bracket where you
Abigail Foster: are noticing a huge amount of money going out of
Abigail Foster: your payslip for student deductions, then it's time to look
Abigail Foster: into whether you should be paying off early. Because like
Abigail Foster: I said at the beginning, those interest rates are not to
Abigail Foster: be laughed at. They are really hefty. And by paying
Abigail Foster: off large chunks, you can obviously reduce the time left
Abigail Foster: you've got to pay. Because if you know you're going
Abigail Foster: to be paying it off in full obviously, and you have
Abigail Foster: that disposal income to do so. Do not bankrupt yourself
Abigail Foster: trying to pay off your student loan. That is really important.
Abigail Foster: I think a lot of people say, " Oh, well, I'll
Abigail Foster: go to my parents and ask for money or I'll
Abigail Foster: take out another loan to pay off my student loan."
Abigail Foster: Please don't do that because it's a really flexible loan
Abigail Foster: you're not going to find anywhere else. And that's why
Abigail Foster: we call it, like I say, university tax as opposed
Abigail Foster: to a loan. But yeah, there's two camps there really,
Abigail Foster: and it very much depends on how it impacts you
Abigail Foster: and your monthly earnings.
Kia: That's really good to know I think. Yeah, so it
Kia: all depends on what your income and outgoings look like.
Kia: Because like I said I have conversations even with my friends
Kia: who say, " Oh, I need to pay off my student loan."
Kia: But I think it is a very personal decision. It
Kia: is how much does it actually impact your income as
Kia: to whether or not you should.
Abigail Foster: It's so personal because also obviously some parents really struggle
Abigail Foster: with it because our parents didn't have this or particularly
Abigail Foster: my parents never went to uni, so they don't quite
Abigail Foster: understand how ... they don't get why it's such a big
Abigail Foster: amount of money, but I'm not worried about it. So
Abigail Foster: the older generation looked at our generation and just can't
Abigail Foster: imagine why we're not paying this off quickly. But it's
Abigail Foster: because it's not really the same.
Kia: Yeah, yeah. It's not how they view maybe mortgages where
Kia: they may overpay their mortgages, it's different like you said.
Kia: So if there's people who have children now or are
Kia: thinking about having kids in the future, what could they
Kia: be doing to think about their kids going to university
Kia: before they hit 18 to make that all easier when
Kia: it comes around?
Abigail Foster: In terms of funding it, I suppose setting up pots
Abigail Foster: for them for the future. We all know compound interest
Abigail Foster: is king or queen. And therefore the earlier you start
Abigail Foster: the better you can build that pot up. So things
Abigail Foster: like junior ISAs or junior bank accounts for young people
Abigail Foster: are really great ways to just put little bits of
Abigail Foster: money away now. And hopefully when they get to it
Abigail Foster: at 18 or whenever they choose to go to university, it's a
Abigail Foster: nice pot for them there that can help them with
Abigail Foster: maintenance or even other things to do with uni.
Kia: Exactly, exactly. So Abigail, before we go, what three things
Kia: would you recommend to someone that they can do to
Kia: help them get a little bit richer?
Abigail Foster: So, first thing would definitely be check that you're paying
Abigail Foster: the right amount of student loan. So throughout the year,
Abigail Foster: checking in on your student loan website and that you're
Abigail Foster: paying the right amount. Secondly, would be looking to how
Abigail Foster: many years you've got left to pay, because there might
Abigail Foster: be a possibility that you might not pay the entire
Abigail Foster: student loan back. So with plan one, that's after 25
Abigail Foster: years, it gets wiped. With plan two, after 30. And
Abigail Foster: with plan five, it's actually 40 years. But if you're
Abigail Foster: in that plan two area and you've only got so
Abigail Foster: many years left, you might not need to repay over
Abigail Foster: if you are never going to repay in full. And
Abigail Foster: then third and finally would be education. Please keep your
Abigail Foster: education up to date and your knowledge because the plans
Abigail Foster: have changed. We know that, we've just discussed it today.
Abigail Foster: But a lot of people don't realize that the plan
Abigail Foster: has changed. And this reflects everything within finance and money
Abigail Foster: right now. Everything's changing. So yeah, keep your education up
Abigail Foster: to date.
Kia: Thank you so much. This has been a very insightful
Kia: episode. It's Black Friday next week, which means Christmas will
Kia: be here before we know it. So in the next
Kia: episode, I want to see if there's such a thing
Kia: as a cost- effective Christmas. Until then, be sure to
Kia: hit follow and leave us a review. Thank you for listening.