Student Loan Repayment Plans and Facts to Know
Your student loan repayments are tied to earnings after university, and many graduates will never have to repay their loans in full.
Many people rightly fear debt and worry about having tens of thousands of pounds of student loans hanging over them on graduation. But student loans are not something to worry about in the way that you might an overdraft or an outstanding balance on a credit card.
The student loan repayment process operates more like a tax: repayments are linked to earnings, and the majority of graduates will never repay them in full.
How student loan repayment works
You will chip away at your student loan as one lump sum, even if it feels like you had two separate loans – one for the cost of your tuition and one for maintenance. They are totalled up, plus interest, to simplify repayments.
When repayment begins depends on what loan plan you’re on and whether your loan was for an undergraduate or postgraduate course.
Plan one loans apply to those who started an undergraduate course before September 2012, or Scottish or Northern Irish students who started an undergraduate or postgraduate course after September 1998.
These graduates repay when they earn more than £1,615 a month before tax, or £19,380 a year in 2020.
Plan two loans apply to those studying an undergraduate university course after 2012 in England and Wales, including students starting out now. These loans don’t need to be repaid until you earn at least £2,214 a month before tax, or £26,575 a year.
Postgraduate loans apply to students in pursuit of a masters or doctoral degree. They repay their loans when they earn £1,750 a month before tax.
The threshold changes every April, rising with inflation based on the Retail Prices Index (RPI).
You start repaying the April after you leave your course as long as you earn over the threshold, and stop if your income dries up or falls below it.
How much of your student loans do you repay?
If you have a plan one or plan two loan you repay only 9% of the amount you earn over the threshold – that’s why the loan operates a bit like a tax. If you have a postgraduate loan it is 6% above the threshold.
That means, in a rough example for the purposes of showing you how repayments work, that if you have a plan two loan and earn a salary of £10,000 above the threshold — that's about £36,575 — you owe 9% of £10,000, or £900 a year. If you earned just £1,000 above the threshold, you'd owe £90.
Those on plan two and postgraduate loans will have their loan wiped if they have not repaid it in full within 30 years of graduation.
How do you repay student loans?
Once you earn more than the threshold your repayments will be automatically taken out of your pay packet at the same time as tax and national insurance. You can see on your payslips how much has been deducted.
If you are self-employed and fill out a self-assessment tax return, you need to state that you have a student loan and HM Revenue and Customs will work out how much you should repay that year. You’ll do so at the same time as you pay HMRC your tax. HMRC then passes the money on to the Student Loans Company (SLC).
If you move abroad for more than three months, you need to tell the SLC and arrange repayment with them directly. The repayment threshold may be different from the UK.
How much interest is added to my student loan?
Plan one loans attract lower interest, just 1.1% at present. It is set at the lower of either the Bank of England base rate plus 1%, or the rate of inflation based on the Retail Prices Index (RPI).
Plan two loans, on the other hand, have been criticised for their higher interest rates. At the moment, while studying, interest is 5.6%. This is worked out as RPI plus 3%. This alters after the April you graduate (or leave your course), at which point interest depends on your income.
If you earn less than the threshold, it is just RPI. Once over the threshold it rises gradually up to £47,835, when it becomes RPI plus 3%. Postgraduate loans attract interest of 5.6% (RPI plus 3%).
Though the interest sounds high, and will increase many graduates’ loans significantly over the decades, it is worth remembering that you'll start paying the extra amount that interest adds only when you have cleared all of the capital of your student loan. And given that you repay at just 9% above the threshold, many people never have to pay the interest because they never clear the capital.
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Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more