Ever since Tony Blair introduced tuition fees, successive governments of all political hues have told the tale ‘there’s no upfront cost to go to university’. I’m afraid that’s a lie.
The English system has a hidden parental contribution built into it. If you hope one day your child will go off to study — it’s likely you’ll need to put money aside, up to a maximum of £17,500. And as the Government refuses to tell you about it, I will.
In fact, today I’m launching a new free calculator to tell you exactly how much you’ll need to save.
Hidden cost: If you hope one day your child will go off to study — it’s likely you’ll need to put money aside, up to a maximum of £17,500
And those savings will be needed, because while once they’re 18, they are old enough to vote, marry or even risk their lives in our Armed Forces — they’re not seen as independent adults under our university financial system.
For most under 25s an increasing amount of their maintenance loan, for living costs, is dictated by an assessment of their parents’ income. And so, by definition, parents are expected to fill that gap.
Yet no one is telling parents.
Tuition fees are not the only problem
While all the political spittle is about tuition fees. In practical financial terms, they aren’t a problem for most students.
For first-time English undergraduates, tuition fees are paid for them by the Student Loan Company, and they can also get the maintenance (living) loan. These loans are then added together, but they’re not repaid by students.
That’s because they only need repaying in the April after leaving university, and, by then, students aren’t students, but graduates (or university leavers).
The hidden parental contribution is therefore a more immediate concern, but before I get into that, it’s important you understand how the current English loan system works. For my full guide, visit my website moneysavingexpert.com/students, but here’s an in-a-nutshell briefing:
- You repay 9 per cent of earnings above £25,725 a year (rising to £26,575 from April 2020).
- Earn less in a year and there is nothing to repay.
- The loans are wiped after 30 years.
- Loans are repaid via PAYE (or self-assessment), they do not go on your credit files
The key thing to grab from this, is that what you earn dictates your annual repayments, not what you owe. Let me drill this in…
It doesn’t matter whether you owe £3,000; £30,000; or a ridiculous £3,000,000.
If you earn £10,000 above the threshold (so currently £35,725) you always repay £900 a year (as that is 9 per cent of £10,000).
The only thing the size of the debt (and interest) impacts is whether you’ll clear it within 30 years or not.
And most won’t. It’s currently predicted that only 17 per cent of students will — mostly the highest earning graduates.
The key thing to remember about student loans is that what you earn dictates your annual repayments, not what you owe
It means in practical terms, for the rest, student loans don’t act like normal loans. They’re more like a 30-year-long 9 per cent additional tax than a debt.
This isn’t me saying it’s cheap, it isn’t, just that people panic about the size of the debt, when it’s often mostly irrelevant – the cost is dictated by the repayments. Many politicians weaponise and demonise the scale of debt.
However, as you’ll discover by reading on, the biggest practical problem for students isn’t that loans are too big, it’s that they’re not big enough — especially as bigger debts wouldn’t increase the cost for most.
This is all about the loan students get (or don’t) for living costs. For under 25s, in almost all circumstances the amount of living loan you get is based on an assessment of what’s called your household residual income.
That’s defined as family income minus pension contributions and a very small reduction for other dependent children.
As most students have little earnings of their own, this is a proxy for parental income. The amount of living loan starts to go down when total family residual income hits just £25,000.
The maximum reduction hits for earnings over £58,000 to £70,000, depending whether your child studies at home or away from home.
And while five years ago all students received at least 65 per cent of the maximum, now some get less than half.
If parents are divorced it’s the residual income of the household of primary residency, including a parent’s partner who may live there.
So, parents, if you start dating a higher earner, beware if they move in as your kids may get less money to live off at university.
Parents expected to fill the gap
The reduction in the loan solely depends on this parental income assessment. Therefore, it is implicit that parents are expected to fill the gap.
In my view it should be explicit. We need transparency. Yet the only official guidance I’ve seen is a flaccid mention buried in the Student Loan Company’s How You’re Assessed guide, which says ‘depending on their income, parents may have to contribute towards your living costs while you’re studying’.
I’d mandate a change, so the Student Loan Company letter says something akin to…
‘Students — your maintenance loan is £6,000 a year, this is less than the full loan and we expect your parents to make up at least the £3,900 difference.’
Even if the loan letter just noted the full loan, and the amount the student will receive, it would help, but it doesn’t.
It simply details the loan that will be paid out, with no reference to the full loan or the means tested reduction.
At my TV roadshows, parents often complain to me: ‘It’s a disgrace, the living loan isn’t enough to cover my kid’s rent.’ Many are gobsmacked when I explain that it would be, but their child’s loan is thousands smaller, due to their income.
The biggest practical problem for students isn’t that loans are too big, it’s that they’re not big enough — especially as bigger debts wouldn’t increase the cost for most
One student, unable to find work outside course hours, desperately struggling on the minimum loan, asked what he could do. I asked if his parents could afford to help.
He replied something akin to: ‘Yes, but their view is now I’m at uni, I should stand on my own two feet.’ They may well think that, but the system doesn’t. After I explained how it worked, his surprised parents started to contribute.
At the very least, if we are going to operate this system — with all its holes — there must be transparency and clear guidance. Lack of it causes friction between students and parents, especially from middle income backgrounds.
Those on very low incomes get full loans, those on very high usually have the cashflow to easily cover the gap.
It also risks leaving some students in a dire position, risking unmanageable debts from commercial lenders (or worse the payday loan vultures who prey on students) or dropping out of university over cashflow issues.
Cost-up using new savings calculator
The lack of knowledge around the true cost of having a child in higher education has bugged me for so long.
So my team at MSE and I have done what the Government should — built a calculator to tell you what you’ll need to contribute.
Simply type in your details at here and it’ll give you an answer.
It then calculates the difference between the full loan (i.e. the amount the state deems appropriate to live off) and the loan received, and gives results for those living at home, living away from home, and living away in London.
For example, someone with a family income of £45,000 now, whose child may go to university in four academic years’ time would need to have roughly £7,800 put aside, in real terms, for a three-year course living away from home.
To save that, you’d need to put aside roughly £100 a month to have the full amount by mid-way through the course.
Of course, there’s no legal obligation on parents to contribute, and student offspring can’t force them. Indeed, these amounts may be unaffordable to some, for example those on a middle income and on a debt management plan.
Yet my hope is that by making this information available it at least provides the transparency that should be in the system.
Someone with a family income of £45,000 now, whose child may go to university in four academic years’ time would need to put aside roughly £7,800, in real terms, for a three-year course living away from home
Why isn’t the Government clearer?
The lack of transparency over the parental contribution isn’t new. Yet in recent years, with a significant increase in the means testing, it has become far more important.
Back in 2016, I wrote to the then University Minister Jo Johnson suggesting it was time to clear it up.
His disappointing and confusing response argued that just because the calculation is based on parents’ income, doesn’t mean parents are expected to make a contribution — he suggested students can make up the difference in a variety of ways, such as from savings or part-time jobs.
That’s true, but that applies to all students regardless of parental income — so why differentiate based on parental income at all.
Why not give all students the same loan? If we don’t expect parents to make up the gap, why consider their income.
I’ve raised the same issue directly with each subsequent university minister — most have been more sympathetic to the plight.
Yet… they’ve done nowt about it. That’s the reason I’m writing about it here in the Mail. Hopefully they’re reading.
My suspicion though is, they don’t want the political risk of having to admit to Britain’s middle-income parents quite how much they must cough up.
Even the full loan may not be enough. If every student receives the same amount, dictated by the full loan, that would leave a level playing field. Yet that isn’t the same as saying university life would then be affordable for all.
For many — especially in big urban centres — student rents have long been rising. They can be astronomical, even for relatively poor accommodation. Due to their relatively short stays, students lack market power.
There is a need for some innovative thinking or codes of practice to improve the student rental market.
The Government’s plan to allow different universities to compete on price for courses may have fallen flat on its bum, with most courses costing the maximum tuition fees.
Yet, perversely, there is an unintended element of cost — many students will need to focus on accommodation and living expenses — and some will need to miss out on the course that’s best for them because of it.
The solution, of course, is bigger loans. Yet in our widely misunderstood system, that’s a psychological deterrent to many, especially those from non-traditional university backgrounds.
It’s time we had proper financial information and education from the state, schools and universities, so people can understand the real costs, to be able to make a better choice.
- Martin Lewis is the founder and chair of moneysavingexpert.com and former head of the Independent Taskforce on Student Finance Information.