You’re probably not surprised that UK students get students loans, just like American students. But what you may be surprised at is how their system for paying for college is much more efficient, resulting in lower overall education expenses and less burden for student loan borrowers after graduation.
Let’s take a basic look at how students loans compare in the United Kingdom vs. here in the United States, and what the US could learn from our friends across the pond.
Getting a UK Student Loan and The Costs of Tuition
The UK has two different types of student loans:
- Tuition Fee Loan: This is the loan that covers your tuition
- Maintenance Loan: This is the loan that you get that covers your living expenses
This is different than in the United States, where all of our loans essentially cover both tuition and living expenses if needed, plus anything else that a student wants to spend the money on. But what makes the UK really interesting is that the UK government caps the maximum amount that students pay for tuition each year.
Currently, the cap is set to £9,000 (approximately $15,000). That means, no matter what – whether a student gets a loan or not – the tuition will be a maximum of £9,000 per year. As for that loan? The UK will lend up to £9,000 each year as well, so you can always get a loan to cover your full tuition each year. And even if you don’t get a loan, that’s still the maximum amount you’ll pay in tuition. It makes for much easier planning and budgeting.
As for that maintenance loan, there are caps on the amount they lend, with a maximum of £7,751 per school year.
That means, if you take on loans for tuition and for living expenses, and go to school for 4 years, the most you’ll ever be in debt is £67,000 (approximately $114,000). And while that may seem like a lot (it is), it is the absolute maximum. That differs from here in the United States, where students can borrow just about any amount they want, and spend it as they wish.
Paying Back A UK Student Loan
Just like in the United States, you must pay back your student loans. However, the UK has an interesting repayment process that makes it easier for borrowers to get started without drowning in student loan debt.
First, you only make payments on your student loan if your income is over £21,000 (approximately $36,000) per year. After that amount, your loan payments are capped at 9% of your income per year.
Also, just like in the United States, UK student loans earn interest as well. However, just like their repayment system, the amount of interest you have to pay on your student loans is also linked to your annual income. And as you can see in the chart below, it is always based around the rate of inflation:
One of the interesting features of UK student loan repayment is that it is handled like payroll taxes once you’re employed. Since all of the loans are handled by the government, once you’re working, your repayment amount is taken out of your paycheck with your taxes. So, you never really need to worry about it unless you work abroad. Because, remember, if you’re not employed (so your income is less than £21,000, then you aren’t required to make payments).
And in this income-based repayment system, the loans will be cancelled at the following times if they aren’t repaid:
- After 30 years
- If the borrower dies or becomes disabled
So, unlike in the United States, where you will have your loans forever if you can’t repay them, the UK system discharges them at 30 years in all circumstances.
Take Aways Here For The United States
There are a lot of lessons we should take away from the UK higher education system. First, unlike in the United States, the cost of education hasn’t risen anywhere near as rapidly due to the constraints the government puts on the maximum amount schools can charge for tuition. As a result, costs are lower, and student loan debt is lower. Even in the worst case borrowing scenario, the amount of debt borrowed isn’t insane, and the repayment system helps the borrower maintain a manageable debt load over time.
We should look into a few things here in the United States:
- Caps on the amounts students can borrow
- Simple standardized repayment programs with monthly payment caps
Given the government is the only public lender for education, there is no reason that these can’t be implemented. And I would bet that having these would actually lower the rising cost of education.
What are your thoughts on the UK student loan system, and what we could do better here in the United States?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.