Autumn leaves mean that the new academic year is about to start for most universities. The beginning of the 2009/10 year has been marked by a shortfall of available places as school leavers opted for further studies rather than joining a tough jobs market.

In England, the maximum university fee rises by £80 to £3,225 for the year. In theory universities do not have to charge the maximum, but in practice the maximum is the norm. The current shortage of university places renders any price competition unnecessary. The government has already said that the maximum fee will increase to £3,290 for the 2010/11 academic year, while at the same time student grants will be frozen. A review of fees from 2011/12 onwards was announced by Lord Mandelson in July this year. It seems likely that the outcome will be a substantial rise - £5,000 has already been mooted as a possibility by the head of OFFA, the quango that polices access to university places.

Under the English system – the other parts of the UK all have subtly different student support rules – the tuition fee is automatically paid by way of a loan which the student has to repay once their education ends. Currently the loan is interest-free, but capital repayment is index-linked to the RPI. Alas, although the RPI is currently in negative territory, this does not mean that loans will shrink in size, as there is a 0% floor. The fee review may suggest that loans start to carry something closer to a commercial rate of interest.

The tuition fee loan is not the only loan for most students. There is also a loan for maintenance, entitlement to 28% of which is now means-tested. In earlier years the means-testing limit was 25%. The maximum loan for a London student living away from home can be as high as £6,928 a year, although most loans limits are lower (see table).

Repayment of the maintenance and fee loans begins once the former student has earnings over £15,000 a year. The repayment rate is 9% of earnings over £15,000 a year. For example, a graduate earning £25,000 a year – the average graduate starting salary in 2009 according to the Association of Graduate Recruiters – will repay their debt at the rate of £900 a year (£10,000 x 9%).

For employed students the loan repayment is made via the PAYE tax system. In that respect it could be regarded as a graduate tax, replacing the current basic and higher rates of tax with rates of 29% and 49%. Once national insurance contributions are taken into account, the graduate employee potentially pays a marginal 40p or 50p in the pound.

Recent research suggested that this year's student intake could owe £23,500 by the end of a three-year course, compared with about £14,000 for today's graduates.

ACTION

University costs are now a serious issue: the drag of substantial debt could loom over even a successful graduate for many years. However, for now it makes no sense to repay student loans ahead of time while their inflation-linked cost is minimal. If, as seems possible, interest starts to be charged on loans for new students, then the picture will change.

It is never too early to start planning for student finances. The pattern of the last ten years and current government budget deficit both suggest that state support will continue to shrink.

 

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