How to fund university: student loans, grants and more

Loans for tuition and living expenses are given by the Government on generous repayment terms that don't kick in until an income threshold is met.

Plus, scholarships, bursaries, grants and student overdrafts can help students cut costs and cushion themselves against unexpected expenses during university.

However, students should avoid high cost borrowing such as commercial loans and credit cards as these can have a long-term impact on their financial health.

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Student loans for tuition fees

Most students can access a student loan to cover the costs of their university tuition fees. These can be up to £9,250 every year, depending on the university and the course taken.

While tuition fees of over £9,000 a year may sound daunting, the official loan to cover these doesn't work as a typical loan for several reasons:

• Interest on these loans is low compared to other loans
• You only repay a Tuition Fee loan when you reach an income threshold
• Repayment is 9% of the amount over the income threshold
• Repayments stop if you drop under

The interest rate applied to the loan changes every April in line with the Retail Price Index (RPI), and interest is charged at RPI + 3%.

At the time of writing, the total interest rate is 5.6%, so the outstanding balance of the loan would increase by 5.6% every year. The current repayment threshold is £26,568 (before tax and deductions).

To show how this works in practice, let take an example of a student taking a tuition fee loan out now with the current interest rates and repayment options.

* For simplicity, we're using the annual interest rate on the whole balance. In reality, the interest would be charged monthly on the balance minus the £37.50 payment.

Hopefully, this demonstrates how much a graduate can expect to pay back even when they start working.

The amount repaid increases as the graduate's salary increases, and payments will automatically stop if their income goes back below the threshold or stops entirely.

Student loans are written off 30 years after a graduate starts their repayments. So, if they don't get a job paying above the income threshold until they're 30, the loan will be written off when they're 60, regardless of anything else.

Note: Scottish students don't pay tuition fees when they study in Scotland.

Eligibility for tuition loan

Students looking at full-time degrees are eligible for student finance in England if they meet the following criteria:

• They're undertaking a course at a qualifying institution (recognised or listed bodies)
• The course is recognised as a qualifying one
• They haven't studied a higher education qualification before
• They are a UK national or have settled status
• They normally live in England
• They have been living in the UK (inc. Channel Islands or Isle of Man) for 3 continuous years at beginning of course, not counting temporary holidays

While all this sounds complicated, the number of people excluded from student finance in England are comparatively few.

Plus, there are exceptions for students with certain residency qualifications or for those studying a second degree in certain subjects such as architecture or physical sciences.

Read more about those exceptions on the Government website.

Applying for a student loan

Students in England usually apply for their loan via Student Finance England.

It's a simple four-step process:

1. Set up an online account with Student Finance England
2. Log in and complete the application form
3. Required details include information about household income including confirmation from parents or a partner
4. If needed, send in proof of identity

Students from the different nations of the UK will apply slightly differently.

Student maintenance loans

Just like tuition loans, the Maintenance Loan is another loan provided by the Government in England which will only be paid back when a graduate is earning above the income threshold.

The main difference between the Tuition Loan and the Maintenance Loan is that the first one is paid directly to the student's university while the second is paid to a student every year.

This means it's the main form of financial support for most students and it should cover the following:

• Rent if living away from home
• Bills
• Food
• Household goods
• Transport costs
• Course materials
• Social events

Maintenance loans for students in England, Northern Ireland and Wales are paid in three instalments at the beginning of each term, so usually September, January and April.

How much is the Maintenance Loan?

The minimum every student in England will receive per year is currently £3,410, but this minimum only applies to students living at home with a household income of £69,977 or more.

In reality, the average maintenance loan is estimated to be around £6,859 a year by the National Student Money Survey.

The level of loan received is based on three factors:

1. Household income
2. Whether the student is living at home while they study
3. If they're living away from home, are they in London or elsewhere?

Students living at home receive less per year as they don't have huge rent bills to worry about, while students living away from home in London receive more money than those studying in other parts of the country because of the high costs of living in the capital.

The thresholds for the Maintenance Loan are every £5,000 up to around £70,000, but this is how some of the major thresholds look for the 2020/21 academic year:

Bear in mind these are bands only. The actual amount a student will receive depends on where they are in the band.

So, a student with a family household income of £35,050 will receive a larger maintenance payment than someone with a household income of £39,950.

As the table shows, the minimum Maintenance Loan in England is currently £3,410 while the maximum is £12,010 and is paid to students from the lowest income brackets living away from home in London.

Over the course of a three-year degree, those minimums and maximums would be £10,230 and £36,030 respectively.

For a student with the average loan of £6,859 per year, the total over three years would be £20,577.

How is the Maintenance Loan repaid?

The Maintenance Loan is repaid under the same terms as the Tuition Loan:

• It's only repaid when a graduate is earning over the income threshold
• It's subject to the same interest rate as the Tuition Loan
• It's written off after 30 years of repayments

These loans should be applied for through the Student Finance England pages on the Government website. There are alternative thresholds and loan details in Scotland, Wales and Northern Ireland under the devolved administrations.

Both the Maintenance Loan and Tuition Loan are bundled together in repayments, so it's worth thinking about the overall costs of repayment.

Here are the minimum, average and maximum Maintenance Loan figures for a three-year degree coupled with the maximum Tuition Loan of £9,250 per year with 5.6% interest:

Again, the headline figures look intimidating, but none of these loans will begin to be paid back until a graduate is earning over the income threshold.

The key point is, the higher the Maintenance Loan on offer, the less students will have to worry about alternative methods of financing their studies.

That said, it's worth taking a look at other options, especially for those students who, despite their household income, won't receive much support from home.

Extra support for studying

The Government, universities and colleges will offer extra support to students in specific situations.

These include:

• Universal Credit for low-income students or parents
• Childcare Grant
• Parents' Learning Allowance
• Adult Dependants' Grant
• Disabled Students' Allowance (DSA)

As the names suggest, these are specific support schemes aimed at students who experience extra costs during their studies.

For instance, DSA is available to full-time and part-time students with an impairment, condition or learning difference. The eligibility criteria and application processes vary across the UK nations, but the principle remains the same - disabled students incur extra costs and need extra support so this is on offer.

The usual rule of thumb when looking at extra finance options is to consider all the options right at the beginning of your studies.

Some, like DSA, can be applied for at the same time as student loans, while Universal Credit requires a separate application to the Department for Work and Pensions (DWP).

Hardship funds

Students who fall into financial difficulty during their studies may be able to access extra financial support from their university or college's hardship fund.

Examples include:

• Students with children, especially single parents
• Mature students with existing financial commitments
• Those from a low-income family
• Disabled students
• Care leavers
• Students who are homeless

Hardship funds are there to help students most in need, but there's no guarantee of success and they should not be relied on as a form of income.

When approaching a university or college to see if they qualify, students will need to provide proof of their income and expenditure such as bank statements and rent details.

Scholarships, bursaries and grants

Scholarships, bursaries and grants are excellent ways of funding university for some students. Best of all, they don't usually need to be paid back.

These funding opportunities can be difficult to find and are tied to certain commitments or student characteristics.

As a rough guide, here's how they differ:

The major problem when applying for any of these student financial support schemes is that they're tricky to find and many students believe they are not eligible for anything.

However, The Scholarship Hub say over £150m every year is awarded to students, so there is definitely a lot of money up for grabs if you can find a scheme that fits your course and characteristics.

Applying for extra support

As the rules around each award vary so much, it's difficulty to give explicit advice about what to do and what not to do.

Here are some of the things to look out for when searching for scholarships, bursaries and grants:

1. How much is the award worth?
2. What can it be used for?
3. How many of the awards are available?
4. Do you meet all the eligibility criteria?
5. What is the application process like?
6. When is the application deadline?
7. What documents do you need to apply?
8. Does the award come with any future commitments?

Some schemes require more detailed applications and are more competitive, so students applying for those will need to put more effort into their application.

Most of all, only apply for a scheme when you meet the eligibility criteria. It's usually a waste of time to apply for something you're almost eligible for, unless the scheme itself says they are happy to receive other applications.

Student and graduate overdrafts

Student overdrafts are a free borrowing option for many students. Plus, many of them allow interest-free borrowing after graduation for a set period of time too.

As our guide to student bank accounts and overdrafts explains, 0% interest on an overdraft balance can be an excellent way of adding to a student's financial cushion during university.

Remember, though, this money will need to be paid back, so check how long the 0% offer lasts for and at what point you will be expected to repay the overdraft and begin paying interest on the balance.

Here's some further information about overdrafts.

A student overdraft is a form of borrowing, so success is based on a student's credit rating. Learn more about checking your credit score.

What to avoid when financing university

Finally, it's worth just looking at what finance options students should steer clear of when they're wondering how to finance university.

High-rate borrowing can seemingly offer a quick fix to financial problems, but the repayment terms can be extreme and the consequences of failing to pay on time can be dire.

As well as the impact on their long-term finances, students could also find themselves unable to study properly as a result of debt problems or begin struggling with their mental health due to the stress of debt.

Avoid the following financial products if you're a student:

• Traditional overdrafts (rather than student ones)
• Commercial loans
• Credit cards
• High-cost short-term credit (payday loans)

Remember, applying to a university's hardship fund is a better choice than any of the above.

We've got more on student budgeting here.

Conclusion: good credit and bad credit

Students are fortunate to have access to low interest rates on loans for both tuition and living expenses.

Compared to credit card interest rates of over 20%, the RPI + 2% model keeps costs for students, plus it doesn't have to be paid back until a graduate begins earning over the income threshold. More than that, the repayment amount is only taken from the portion of earnings above the threshold rather than the whole salary amount.

So, the Tuition Loan and Maintenance Loan are classed as good credit, with students knowing the debt will be written off in 30 years if they don't manage to repay it all.

In addition, there is around £150m in scholarships, bursaries and grants to be grabbed by students if they search carefully for them and check whether they meet eligibility criteria. These don't have to be repaid and they can be an excellent way of accessing extra funding during a degree.

Taking a student bank account with a 0% interest overdraft is another way of keeping costs down, as long as we remember we need to repay it.

Alongside these positive options, however, there are bad credit choices that could leave financial scars for years to come.

Avoid high-interest borrowing and be aware of your credit rating and future commitments. The beauty of student-focused finance is that it comes with repayment cushions, while traditional borrowing doesn't.

Wherever possible, go for the student option ahead of anything else.