You may also find useful: Attending University without Student Loans
When it comes to growing your pennies, debt is a major hurdle for most people. Simply put, having personal debt costs you money that could otherwise allow you to grow your pennies.
However, debt is often unavoidable for most of us as it allows us to buy what we need today in exchange for a promise (and obligation) to pay it back tomorrow. After all, not many of us have enough to pay for a car, or a higher education, or a house, when we are beginning our adult lives.
It is important to remember though, that debt comes at a price –the interest we must pay for the privilege of using money that does not belong to us. The price of debt can make it very difficult to grow your pennies over the long term so over the next few posts Magical Penny will be exploring various forms of debt, the false assumptions and beliefs, and the many pit-falls surrounding the use of credit.
For many of us the first real debt we acquire is in the form of student loans. Compared with the US and other countries, student loans in the UK are a relatively new invention. Before 1998, the Education Act of 1962 made it a legal requirement for the local education authorities of the UK to pay for tuition and a maintenance grant. That’s right: university was free! (and remains so in Scotland).
As student numbers rose, the case was made in Parliament that this was not sustainable and tuition fees were introduced in 1998. They have been increasing ever since; from £1000 up to the current level of a maximum of £3225 a year.
Most of us going to university will have had dealings with the government’s non-departmental body, The Student Loans Company. It was formed in 1990 to help with additional ‘maintenance loans’ and only helped a few students at first but it has since become the only way that most of us can afford to go to university.
Whilst the accepted wisdom is that debt should be eliminated as quickly as possible, the student loans in the UK are possibly an exception to this mighty personal finance rule.
Debt is rightly vilified by most people because:
- It costs you money in the form of interest
- It adds ‘risk’ to your life. –if you cannot pay your debt payments for any reason you risk losing other possessions, adding further stress to your situation.
However, loans from the UK Student Loans Company are structured in such a way as to eliminate both these traditional negatives of debt: the interest rates on student loans are set so low that they have little ‘real’ cost compared with inflation (the interest rate is currently at 0% until March 2010 at least). For loans made after 1998 there’s the added benefit that there is no risk of default (failing to pay back the loan), as you only need to pay back 9% of anything earned over £15000. This is done automatically through your employer (or directly through the Student Loans Company if you’re oversees or self-employed). If you earn below £15000 you do not have to pay anything, and if you lose your job your payments stop too. Credit scores are unaffected.
For current students if the debt if not fully paid off in 30 years it is forgiven. For earlier graduates like me (who started after 1998 but before 2006) , student loan debt is forgiven at 65 years old.
What a relief! No paying back student loans with your pension money!
The Bottom Line
This might all seem a little complex, but the bottom line is that UK Student Loan Company loans are still debt but they do not have the traditional down-sides of risk and cost. And of course there’s benefits to receiving a higher education too but that’s a whole other post.
Personal finance is all about priorities
Do you think it’s worth paying extra payments on a student loan debt given these favourable factors? Or is saving for a house and/or learning about investing in equities a better path to take? I would argue that the latter is way to go, but remember, finance is personal.
What’s your take on student loans?
You may also find useful: Attending University without Student Loan
Look out for more Magical Penny posts in this series on debt to make sure that you fully grasp when loans can be helpful and when credit can be destructive over the long term. Don’t miss a post: sign up for free updates.