University costs – What is the reality
With tuition fees set to rise on 1 August, what could this financially mean for the next generation of aspiring undergraduates and how could this be paid for?
Tuition fees
From the 2025/26 academic year, tuition costs will increase to £9,535 per year for three years falling under the ‘Plan 5’ cohort, the fifth version since tuition fees were introduced in 1998. When it comes to paying for this, you have two options: pay the fees yourselves or get a tuition loan, which is paid directly to the university to ensure it’s not spent on other aspects of student life. If you take the loan, it would accrue interest from day one at the rate set by RPI* in the previous March, currently 3.62%. This means after three years, you would owe £31,886 in the unlikely event RPI doesn’t change. This is the most common option with 1.5 million students taking the loan, totalling a huge £20 billion of debt.
Maintenance loans
With tuition costs sorted, the next most significant cost is normally living expenses. The government offers a maintenance loan, with a maximum of £10,544 and a minimum of £4,915 per annum, means-tested against your household income. So if your total household income is above £62,000, you will only qualify for the minimum loan of £4,915 per year to cover food, accommodation, and other living expenses, and that’s before socialising is factored in! On average you will have to pay rent for 40 weeks each year, giving you a weekly pot of £123 over this period. The interest on this loan is also based on RPI from day one, potentially amounting to £16,436 after three years.
Accommodation & other costs
The government expects individuals to cover any excess costs. For most students, this means a combination of working and parental financial help. Accommodation costs vary significantly and for example in Liverpool, annual rent ranges from £3,780 to £7,140. Obviously, the most expensive option will be the most appealing in terms of location, facilities, and overall living standards with the top end offering on-site gyms, rooftop terraces and cinema rooms. So if you took the cheapest accommodation and had the lowest maintenance loan, this would leave you a paltry £28 a week to live off before requiring support from other sources.
The options to top up your income will typically be funding from parents or through taking on a part-time job. Many universities have links with local businesses and can help you source work to fit around your studies.
Post-university and repaying the loan
Assuming all goes well you will graduate with a degree, as well as a number of loans amounting to c.£48,000. Repayment isn’t optional, but you would only start repaying once your earned income exceeds £25,000. According to the Department of Education Statistics, the current average graduate salary in the UK is £40,000. This means that should you start on the average wage, you would repay 9% on the amount exceeding the £25,000 threshold, which is £15,000 amounting to repay £1,350 annually, but with the interest rate at 3.62%, the outstanding loan would still grow by over £1,300 each year meaning you would hardly be making a dent in the debt!
How best to repay?
The good news is that any unpaid loans are written off after 40 years, and don’t affect creditworthiness for mortgages, but can impact affordability. Most people will just incorporate the monthly repayment into their normal expenses, but what if you have cash available from maybe savings or an inheritance?
Using a government gateway account, you can make additional repayments to reduce the loan term, though it won’t lower the monthly payment. So if you have a spare £48,000 potentially to be used for a house deposit, is it worth repaying your debts and wiping the slate clean?
My thoughts
Generally speaking, not using capital to pay off student loan in the early years seems like the most sensible solution for many, for the following reason:
1. Borrowing an additional £48,000 for a mortgage at an interest rate of 4.39% to pay off a student loan charging 3.62% is illogical.
2. With a small house deposit and an average entry-level wage of £40,000, options for buying a house would be limited.
3. Having an accessible sum gives options. Before deciding when to buy a house, you could travel, buy a car, and enjoy life without the burden of a mortgage.
4. If you were to invest the funds, they could potentially grow at a rate higher than the interest charged. This isn’t guaranteed, but by allocating amounts into different risk profiles based on when they might be needed, volatility could be reduced.
To point out, these are our general observations and thoughts. Everyone’s financial situation and beliefs are different and the list of potential questions and options is endless, but before committing to higher education ensure you know what you are getting into, and then work on finding the solution that fits you best, both now and in the future.
Written by Mark Barlow, Experiences Specialist.
*RPI – Retail Price Index the inflation measure set monthly by the Office for National Statistics
This blog is intended as an informative piece and should not be construed as advice. If you have any further questions, please don’t hesitate to get in touch with us.
