Thursday, 12 January 2012

Financing University Study in England for £150 a month!

My son is going to study Engineering here in the UK.  It’s a 4 year course, and we have to find some way to finance it.

The cost of tuition is £9000 a year, and the living expenses are about £1000 for each of 3 terms.

Where will we get the money?

Anyone can apply for a loan of £9000 for tuition, and for living expenses up to £5500 a year if you live away from home outside London.  The living expenses is means tested, but anyone can apply for 65%, so there’s 3575 available.

That brings the annual loan funds available to £12,575, or over the entire course, £50,300.  After you add the 3%, you get a total of £51,809 in todays money at the end of the course owed.

For reference, here’s a link to the page on loans

How does interest accrue?

The loan costs RPI + 3% while studying.
After you leave, if  you earn £21,000 or less, RPI
£21,000-£41,000 RPI + rate between 0-3%
£41,000+ RPI+3%


As a side note, it is not apparent whether the RPI changes year on year or not.

How is the loan Paid Back

The loan is for a fixed period of 25 years from the date you finish. 

You repay 9% of the amount you earn over a threshold (£21,000 a year), and if after 25 years, it’s not repaid, the debt is wiped out, or if it’s not repaid by the age of 50, or if you die or are unfit to work!

How much do you need to earn to pay this back?

51,809 / .09 = £575655.  Divide this by 25 years, and you get an average annual salary of £23,000 over the threshold required to pay this back, giving an average  monthly cost in today’s money of £172.50, but the reality is slightly different.

Assume you earn the worst possible situation for accruing interest, that is income of £41000 a year, so you get hit with the full 3% + RPI.

After 25 years, you’ll end up having repaid 46,800 of the £50,300 originally borrowed.  That’s a savings of  £3500!

If you average £50,000 a year, your loan still is not paid back, in full, leaving a balance of £13,000, but the effective interest rate you borrowed the money at is 1.2%  + RPI

Try getting that rate from a bank for a mortgage!

If you average £60,000 a year, you finally pay back your obligation:  After 20 years!  The effective rate is 1.9% + RPI in that case.

Finally, let’s say you get really lucky and earn £100,000 a year.  Then payback happens after 9 years, at an interest rate of 3.9% + RPI.

Am I better off with a smaller loan? Probably Not!

Lets assume you have some money put aside, and you use that to fund the maintenance expenses entirely.

Your total borrowing drops to £36,000, Initial loan starts at £37,080.

£100,000 salary pays back after ~5 years at about %4.2 + RPI
£60,000 salary pays back after ~12 years at 2.0% + RPI
£50,000 salary pays back after ~18 years at 1.8% + RPI
£41,000 salary leaves a balance of £12,010, but you’ve repaid an extra £10,800 at a cost of 1.05% + RPI.

All of these outcomes are worse!