Student finance applications are opening soon in the UK, and more than a million students are expected to apply. However, many students are unaware of recent student loan repayment changes that could increase the amount they repay! Here’s everything you need to know about the recent student loan changes.
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How will student loan repayments change in 2022?
The government recently announced a series of student loan repayment changes that could affect how much you have to pay back. A key change is that the repayment threshold will freeze at its current rate from April 2022. This means that the minimum salary that you need to earn before repaying your loan will remain the same despite inflation.
Usually, the repayment threshold increases with rising wages and inflation. This is done to reflect the rising cost of living and support lower-income graduates. Before the changes were made, the threshold was supposed to increase by 4.6% this year. However, the freeze means that more people will start having to repay their loans sooner, which could tighten the financial squeeze!
Who will be affected by the student loan changes?
The proposed changes will affect Plan 2 and Plan 3 student loans. Plan 2 student loans are undergraduate loans taken out on or after 1 September 2012. The current Plan 2 threshold is £27,295. Those who are on a Plan 2 loan will be required to repay 9% of anything that they earn over the threshold.
If you are an EU citizen studying in the UK, Plan 2 loans are those that were taken out on or after 1 September 2021.
The threshold for Plan 3 loans will also be frozen at its current rate of £21,000 from April 2022. Plan 3 loans are those taken out by postgraduate students on or after 1 August 2016.
Will the threshold freeze increase the amount you pay back?
The repayment threshold freeze means that more graduates will need to repay their loans from an earlier date! This is due to rising wages.
As a result, those earning a pay rise to a £30,000 annual salary will have to pay back an extra £113 per year from April! The figure will be even larger for higher earners and could tighten the financial squeeze.
Importantly, as wages increase, a rising number of lower-income graduates will meet their threshold and be required to begin making loan repayments. This could become tough as inflation continues to soar in the UK!
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How can you fund university without a student loan?
The financial burden of a student loan can be daunting for some graduates. However, it is possible to go to university without taking out a loan. Here are three ideas for students who want to avoid debt!
1. Take time out to save!
Unlike school or college, there are no age restrictions on when you can study at university. Therefore, it may be a good idea to take a gap year (or two) and use the time to build your savings! This is an excellent way to fund your studies without taking out a student loan. Many students will use gap years to take entry-level jobs or start up their own side hustles to minimise the amount that they need to borrow.
Moreover, you could invest your savings in a high-interest savings account or stocks and shares ISA to maximise your funds for university.
2. Work while you study
You don’t have to take a gap year to pay your own way at university. It is possible to have a part-time job whilst you study and earn enough to cover a large chunk of your expenses.
Part-time university courses are popular with people who want to earn a living whilst doing their degree. These courses take longer to complete but free up more time during the week for you to work. Although they take longer, part-time university courses come at no extra cost!
3. Generate a passive income stream
If you’re worried that part-time work may disrupt your studies, generating a passive income stream could be the best option for you! Passive income is a source of income that requires little to no work, meaning it can be easily maintained alongside studying at university.
Most passive income streams take time to set up. As a result, this may be a good option for postgraduates who could start creating passive income during their undergraduate courses. Great sources of passive income include owning dividend stocks, affiliate marketing, blogging and drop shipping. You can start each of these with a relatively small deposit and minimal experience.
The post Student loan changes could cost graduates over £100 per year! appeared first on The Motley Fool UK.
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