If you watch any TV at all you have probably seen adverts for companies who help you claim against mis-sold loans and payment protection insurance (P.P.I.). Banks have been told to pay back money to customers who may have been mis-sold an agreement - either because it wasn’t properly explained to them, they weren’t told about it, or other, similar, reasons. Of course this is a good thing, as nobody likes the idea of feeling they have been conned into something they didn’t properly understand. It would be like a salesman coming over to your elderly grandmother’s home and convincing her to buy something she didn’t really need. While your gran may not be very tech-savvy, for example, not every A level student is studying economics or maths. So, before you sign up to pay £9,000 per year in tuition fees, do you really understand how it works – and how much you will be paying back?
At the moment the repayment rate on your tuition fees and any maintenance loans, as you may have been told, is set at R.P.I. (retail Price Index) plus 3% while you are studying. When you graduate your interest charges change, depending on what you are earning. It is R.P.I. plus up to 3% for those earning between £21,0000 and £41,000, and R.P.I. plus the full 3% for those earning over £41,000 per year.
Does that make sense?
Probably not if you don’t understand what the Retail Price Index is – let alone if we start talking about compound interest!
This is why financial institutions like banks are usually obliged to show easy to understand details on how interest payments will work – including information on how much you might expect to have to pay back. For many A level students, however, this information is often boiled down to being told that interest rates on student loans are low and you don’t have to pay them back until you are earning a certain amount of money anyway.
This could give you the false impression that your loan is frozen until you are earning a certain amount, whereas actually your loan will begin to accrue interest from the moment you take it out. So, by the end of the first year of university your £9,000 loan will already have been happily building up at a rate of R.P.I. plus 3%.
The Retail Price Index is the tricky part here – mainly because you may not know what it actually is. The Retail Price Index (RPI) is a measure of inflation that is based on the cost of representative goods and services, which are then assessed and placed against a base rate that is set for the year. This changes monthly, meaning it is tough to put an exact figure on it. You can find out more about the Retail Price Index and also how inflation and interest rates work in these quick articles.
However, to keep it simple, these rates are far from the low repayments that so many students are simply told they are. Sadly, in some instances, careers advice has not caught up with this sufficiently to ensure students are aware of the exact financial implications of repaying at least R.P.I. on a loan of at least £30,000.
Some have even gone as far as to say student loans have been miss-sold. These voices include Simon Crowther a civil engineering graduate who has accused the government of miss-selling loans to young people and has argued that he would have to be earning over £41,000 per year just to cover the interest payments alone.
Whether or not you agree with this, the fact here is that A level students, parents, and teachers all need to understand the financial realities of student loans rather than relying on a belief that they are low interest and that you don’t have to think about paying them off until you are earning a certain amount.
You can’t decide if going to university is worth it unless you know what the longer term cost actually is and that’s even before wondering whether or not you are prepared for university!