Many students and graduates feel concerned about their hefty student debt, but read this quick explanation of how the system works, and hopefully you will stop worrying 😉
Far more relevant than the amount of money you owe, is the amount you actually repay.
A student loan is not a normal debt
Your student loan acts more as a graduate income tax: unlike commercial loans, repayments are calculated on how much you earn, not on how much you owe (amount borrowed + interest).
So if you don’t earn enough, you don’t repay.
If your income drops, so do your repayments (this happens automatically).
You don’t start repaying until you earn over £27,295 a year* (before tax).
Once you earn more than this threshold, you pay back 9% of your annual income above £27,295, until either the outstanding amount is written off after 30 years, or the debt is cleared before this time.
So if your annual salary is £31,295, you earn £4,000 over the threshold; therefore you’ll pay back 9% of £4,000 = £360 a year (£30 a month). . And whether you borrowed £50k or £50m, your repayment is the same!
*You start repayments at a lower threshold if you’re from Scotland or Northern Ireland.
Monthly loan repayments related to income
| Annual income (before tax) | Monthly repayment |
| £27,295 | £0 |
| £30,000 | £20 |
| £35,000 | £58 |
| £40,000 | £95 |
| £45,000 | £133 |
Source: Student Loan Repayments
If you haven’t repaid your loan within 30 years, the remaining debt is wiped.
Apart from the highest earners, most graduates will never have to pay back the full amount they borrowed.
You may never pay a penny back, or you may clear the total debt…but your annual repayment will never amount to more than 9% of your income, and for a maximum of 30 years
Basically, the psychological connotations of ‘being in debt’ are worse than the financial reality, with many graduates feeling uncomfortable about owing large sums of money, and believing it may influence their choices on careers, living situation and other opportunities. But if you can get your head around the fact that your student loan is not real debt, you should start feeling better about it. As Martin Lewis (Money Saving Expert) explains in this article, it is more like a graduate tax or ‘contribution’.
Think of it as an investment in your future – one that has given you huge enjoyment and many advantages on top of your degree!
Find out more:
Student Loans – The Lowdown
Need-to-know info on student loans, including when, what & how you repay, & the effects of interest rate changes
Should You Pay off Your Loan Early if You have Spare Cash?
Options, benefits & drawbacks
