Fees, loans and grants: untangling the money mess

The headline figures may be scary, but the facts should put your mind at ease, says Amy McLellan

For parents, the day that their offspring leave for university is a proud one. But it's pride tinged with anxiety as your young adult steps out from the safety of the family home. Whether or not you've been to university yourself, the new student finance regime for 2012/13, with its eye-watering course fees and complex matrix of loans, grants and bursaries, only compounds that anxiety.

For parents, the day that their offspring leave for university is a proud one. But it's pride tinged with anxiety as your young adult steps out from the safety of the family home. Whether or not you've been to university yourself, the new student finance regime for 2012/13, with its eye-watering course fees and complex matrix of loans, grants and bursaries, only compounds that anxiety.

For students starting the 2012/13 academic year, their annual tuition fees can be up to £9,000 – that's £27,000 over the course of a typical three-year degree. On top of this, students need somewhere to live, and to eat and drink, which the National Union of Students (NUS) reckons could add more than £12,000 a year to the tally. And taking out the full complement of tuition fee and maintenance loans quickly adds up to a total debt load of £50,000. But before the panic attack sets in, it's well worth arming yourself with the facts. As many working in student finance will tell you, quietly, many students have never had it so good.

Firstly, and most reassuringly, absolutely no money is needed upfront. All course fees are paid for by a loan from the Student Loans Company (www.slc.co.uk). Everyone is entitled to this, whatever their household income, and the loan is paid directly to the university or college. Your would-be student should already have applied for this. If not, take action now – students can still apply even though the deadline for September 2012 entry has passed.

"If a student's going through clearing, they should apply now even if they're not sure where they're going," says Rachel Lyons from the student finance department of the University of Portsmouth. "There may be a delay in the loan arriving for the start of term, but universities have contingency plans and can make loan awards to cover this."

Many parents are wary about their children taking on debt before they've even embarked on adult life, but this isn't like a commercial loan – it only needs to be repaid once your child, not you, is earning enough. Never allow course costs to influence your child's academic choices – whether your child opts for a course with a £6,000 price tag or the maximum £9,000, their repayments are the same. "It's a lot less scary to think of it as a graduate tax," says Lyons. "It's linked to their salary and will be deducted at source."

The repayment threshold for 2012 starters is a salary of £21,000. If they never earn this much, then they don't have to repay a penny. This is an improvement on the 2011 regime, where the threshold was £15,000. Now graduates repay 9 per cent of their pre-tax annual earnings above £21,000 and the deductions are made through the payroll, just like a tax. On a salary of £22,000, graduates will pay 9 per cent on the sum over the threshold (£1,000), which works out at £7.50 a month; at £30,000, the monthly repayment is £67.50 and on £50,000 it's £217.50.

Importantly, if a graduate loses their job or their income drops, then the loan repayments either stop or are reduced. There are no debt collectors, it doesn't go on credit files and the debt is never passed on to you, the parent. And the debt is wiped after 30 years so many students won't repay in full anyway. However, for the first time, 2012 starters will be charged an "above inflation" interest rate of RPI plus 3 per cent, so it will take longer to clear the debt.

The fees loan from the SLC doesn't cover living costs. Before your child starts university, make sure both of you have a realistic idea of how much it costs to be a student in 2012. Living costs will vary, but the NUS estimates between £4,000 to £5,400 on rent, £2,000 on food and household goods, £1,500 on travel, £1,300 on leisure, plus £40-£65 on insurance.

The Government provides help with these costs through a maintenance loan, which are also available from the SLC. These are usually paid at the start of each term. The maximum annual loan is £4,375 if a student lives with their parents and £5,500 if they live away from home (£7,675 in London). Up to 65 per cent of the 2012 maintenance loan is available to everyone, regardless of income, but the remainder is based on your pre-tax income minus pensions.

Your income also counts when it comes to maintenance grants. If your household income is less than £42,600 a year then your child will also be entitled to a non-repayable grant. If the household income is less than £25,000, your child will receive the maximum grant of £3,250 to help with living costs. This is where it gets complicated, because if you're entitled to the full grant you can't get all of the maintenance loan, but you should still come out on top.

Universities and colleges also offer scholarships and bursaries. Unlike loans, these don't have to be repaid. The level of support, eligibility criteria and payment dates vary from institution to institution, so it can be well worth looking into. The sums involved can make a significant difference to your child's income, so make sure they are getting everything they're entitled to. At the University of Wales, Newport, for example, the poorest students can receive £4,000 in their first year while those with family incomes of between £25,000 and £50,000 will be eligible for £2,000.

Some universities will have a set number of awards, made on a first come, first served basis. Other institutions have no limits on the number of grants they award. At Portsmouth, for example, there's no limit on the numbers of grants – if you're eligible then you get the award. This additional support can be paid in three different ways: a fee waiver, a cash gift or via help with living costs. Some scholarships are based on academic performance, while other grants may be available for those with disabilities.

Clearing students must ask about bursaries and scholarships. Although decisions should always be made on academic grounds, if all other things are equal, then the offer of reduced fees or a cash bursary could sway the outcome.

Have a realistic chat about budgeting and about the contribution you're able to make. Discuss hidden costs that need to be considered such as broadband, laundry costs (as much as £10 a week in a launderette) or expensive course materials. There are lots of online tools to help with managing money, such as studentcalculator.org.uk, which has been designed by the education charity Brightside.

Student budgeting is difficult because students get paid lump sums at the start of every term which they then have to eke out for the whole term and the holidays – which is why a holiday job can be so useful. Make sure you know when different sums of money are due in – institutions pay scholarships and bursaries at different times. At De Montfort University, for example, its bursaries for the 2012 intake are not being paid until February and May to help students through that difficult post-Christmas period.

Make sure your child knows where to turn if they do run into financial difficulties, whether that's the bank of mum and dad or advisers at the university, and that they understand the risks of payday loans or unauthorised overdrafts. Getting into the right financial habits now could pay dividends later in life.

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