Student loans simply explained!
In this article, we cover what, when and how you repay, what interest is charged on your loan and other need-to-knows.
Also see our related topics on whether to clear your debt early if you have spare cash, and why commercial borrowing is very different.
But if you’re worrying about your student debt, please first read why there’s no need to stress…
In this article:
How the repayment system works – when you start & stop payments, & how much you pay
Interest on your loan
Interest charges & payments, & what happens if interest rates change
How you repay through the tax system
If you work for an employer, if you’re self-employed or if you live overseas
Student Loans Overview
Increased tuition fees, rising interest rates and the replacement of maintenance grants with loans, means most graduates now leave university with significant student debt (average £50,800), which they will be repaying over many years. But whilst this might sound daunting, far more relevant than the amount of debt you rack up, is the amount you actually repay.
A student loan is not like a normal debt – delayed repayments, the write-off period and the fact that repayments are linked solely to what you earn not what you owe, make the student loan one of the safest, and for some the cheapest forms of borrowing. So it’s not always wise to pay off your loan early, even if you can afford to.
New loan plan introduced in England for 2023 starters
A new Plan 5 took effect in England for new higher education starters from August 2023, with changes to the income threshold at which repayments start, the interest rate, and repayment term. The reforms aim to stem the rising cost of student loans, shifting much of the burden away from taxpayers onto graduates.
Students who began undergraduate study in England and Wales from September 2012 – August 2023 would be on Loan Plan 2.
The student loan repayment system is similar throughout the UK, but some different rules apply to Wales, Scotland and Northern Ireland. For more information, or if you’re unsure what type of loan you have, click here.
Note that the student finance system may change again, so it’s worth keeping an eye on government announcements, so you can work out how any changes will affect you.
Information Source: Institute for Fiscal Studies (IFS)
Universities are allowed to raise tuition fees each year in line with inflation. Maximum annual fees (charged by the majority of universities) are capped at £9,250 at least until the 2025/26 academic year.
You can get additional student finance to help towards your living costs at university/college. The amount you can borrow depends on various factors, such as household income. For more details and how much you’re entitled to, click here.
Maintenance grants were replaced with maintenance loans in 2016. As a result, students from lower-income families, who now have to borrow more to fund themselves through university, are graduating with the highest debts, of over £57,000.
Student Loans Company (SLC) – GOV.UK
The SLC is the government-owned organisation responsible for managing loans and grants to students in colleges and universities across the UK. You can apply for finance, track your student loan, update your details, make an extra payment etc.
Make sure you keep SLC informed of your contact address and employment information, because otherwise they might impose a penalty interest rate for ‘failing to respond to requests for information or “losing touch” with the company.’
Apply for student finance as a new or continuing student.
Log in to your account to view statements or check repayments.
Update your personal details e.g. if you change your course, when you leave university, change your address or marital status.
Update your employment information or tell them you’re going abroad (for over 3 months)
For any enquiries concerning your loan.
Or call SLC: 0300 100 0611
Student Loans Company (SLC) – GOV.UK
Find out when you start and stop repaying your loan, and how much you pay.
Unlike commercial loans, repayments are not based on how much you owe on your outstanding debt, but solely on how much you earn.
When you repay
The earliest you begin repayments is the April after leaving university/college. (Note Plan 5 repayments won’t start before April 2026). And, you won’t need to start repaying your student loan until your income reaches a certain threshold:
Plan 2 income threshold for repayments (before tax) is £27,295 a year, or £2,274 a month or £524 a week.
Plan 5 (from August 2023) income threshold for repayments (before tax) is £25,000 a year, or £2,083 a month or £480 a week.
If you don’t earn enough, you don’t repay anything.
Even after you start repaying, if your income drops below the threshold in any year, you can stop repayments (unlike normal borrowing, where you must continue regardless of your circumstances).
How much you repay
However much you borrowed, repayments are proportionate to your earnings – you repay 9% of everything you earn above the threshold, until your debt is cleared or written off. If your income falls, so do your repayments.
Examples of repayments:
Plan 2 loans
If you earn £26,000, this is below the £27,295, so you make no repayments.
If you earn £30,000: that’s £2,705 above the £27,295 threshold, so your repayment will be 9% of £2,705 = £243 a year, or £20 a month.
Plan 5 loans (from August 2023)
If you earn £26,000: that’s £1,000 above the new £25,000 threshold, so your repayment will be 9% of £1,000 = £90 a year, or £7.50 a month
If you earn £30,000: 9% of earnings over £25,000 = £450 a year, or £37.50 a month
Monthly loan repayments related to income
Any unpaid student debts are wiped after the write-off period. However much you still owe, your repayments stop.
For Plan 2 loans, the write-off period is 30 years. According to the IFS (Institute for Fiscal Studies), under a quarter (23%) of graduates under Plan 2 repay their loans in full. And this would be the very highest earners.
For Plan 5 the repayment term has been extended to 40 years. Under this new system, it is expected that over half (52%) of graduates will repay the full amount they borrowed, with many people paying for their degree over the full 40 years. In this sense, your student loan effectively works like a graduate tax, whereby you’ll pay an extra 9% tax on your income throughout most of your working life.
Use this Student Loan Repayment Calculator to work out how much of your loan you might expect to pay back and over what period of time.
You can check your repayments and balance in your online account or your annual statements from SLC.
Interest on Student Loans
Interest is what you are charged for borrowing money, but in the case of student loans, it’s important to remember that what you are charged is not necessarily what you pay! As explained above, your repayments are calculated on how much you earn, not how much you owe (your outstanding loan + interest charges).
How it works
Interest rates are linked to inflation
The interest charged on student loans is linked to the Retail Price Index (RPI) measure of inflation. The rate is set each September, based on the RPI inflation rate from March of the same year*. Your outstanding loan amount accrues interest during university and after graduation.
Under Plan 2, your loan normally* accrues interest at RPI + 3% while you are studying, and until the April after you have left university.
From the April after graduation, you are charged interest on your outstanding loan, on a sliding scale according to your income (ranging from RPI up to RPI + 3%). This basically means that the higher your income, the more interest will be added to your student loan, until you have paid it off or it is written off.
The Institute for Fiscal Studies (IFS) calculates that the average student on Plan 2 will have accrued £5,800 interest by the time they graduate. And higher earners charged the top rate after graduation ‘could end up paying interest of £40,000 on top of the amount borrowed.’
For Plan 5, the interest rate on student loans has been cut to the Retail Price Index (RPI)*. (The change will benefit mid to high-earning graduates, who are the only people likely to pay back the original sum borrowed plus all the added interest, before the write-off deadline).
* Note: As inflation is currently running high, the Government has temporarily capped the interest rate for all students and graduates at 7.3% (from September 2023).
If the interest rate = inflation rate, there is no real cost
Inflation is the general rate at which prices rise. For those graduates being charged interest equivalent to the rate of inflation (RPI), as with Plan 5, there is no real cost to your loan:
If inflation = 3%, it means that if your loan can buy a certain basket of goods this year, the price of that same basket will rise by 3% next year; so you would need to spend 3% more to buy exactly the same things. Therefore, paying back 3% more is the same real cost as your original loan.
Why linking interest to the RPI measure of inflation is problematic
There is mounting pressure for the Government to switch from using the RPI (Retail Prices Index) to the lower CPI (Consumer Prices Index), for calculating student loan interest rates.
Why does it matter?
Both RPI and CPI measure inflation (the rate of change of prices for goods and services), by monitoring the changing cost of a ‘basket’ of goods e.g. food, petrol and household products, but they cover different items and are calculated differently. RPI almost always gives a higher figure (on average 1.2% above CPI). The higher the inflation rate, the higher the interest rate charged on student loans, so it does make a difference which measure is used.
Inflation – August 2023
6.7% CPI Consumer Prices Index
9.1% RPI Retail Prices Index
The Government generally pegs the payments it makes to the lower CPI (e.g. pensions, benefits) and the payments it receives to the higher RPI (e.g. student loan repayments, train fares and taxes). However, to help struggling small businesses, they have now switched to rise in line with CPI, so we hope student loans will follow suit!
Find out more here about the difference between RPI and CPI.
Avoid penalty interest rates
Keep the Student Loans Company up to date with your contact details and employment information, to avoid being charged a penalty rate. If you don’t provide the information they require, they may apply a penalty interest rate regardless of your income, until they have all the details they need.
How does a change in interest rates affect student loans?
A rise in interest rates increases debt levels for everyone, but only the repayments of high earners
Higher interest rates will increase the overall amount you owe on your student loan (amount borrowed + interest), but it won’t impact your monthly repayments, and most people will end up paying no extra overall.
A rise in rates won’t change what you repay each month, because that is based on how much you earn, not how much you owe (i.e. each year you repay 9% of your earnings above the threshold (Plan 2 = £27,295, Plan 5 = £25,000).
Most people will be unaffected by a rise in interest rates, because they will not clear the original sum borrowed plus all the added interest, before their debt is wiped. Whilst they might pay some interest, it won’t all be at the higher rate. And lower earners won’t even repay the amount they borrowed, never mind any interest it has accrued.
The borrowers who will feel most impact are bigger earners who are set to pay off their loan within the repayment period (i.e. 30 years on Plan 2, 40 years on Plan 5.) The increased debt will take them longer to clear, with the higher interest adding thousands to the amount they pay back.
The very highest earners pay off their loans more quickly (because 9% of their income above the threshold is a larger amount of money); faster repayments means their debt accrues less interest, so they will be less affected by a rise in rates.
How You Repay
Once you start earning over the threshold, your student loan is repaid automatically via the UK tax system. It works differently depending on whether you are employed, self-employed or living abroad.
If you work for an employer
Repayments will be deducted automatically from your salary via PAYE (Pay As You Earn), along with Income Tax and National Insurance. You need to tell your employer that you have a Student Loan (usually by completing an HMRC New Starter Checklist for your first job).
If you complete a Self Assessment tax return
If you are self-employed, or have other income that is not taxed automatically through the PAYE system, you pay tax and student loan repayments through the Self Assessment scheme. Notify that you have a Student Loan by ticking the box on your Self Assessment tax return. They will then calculate your repayments, which you make at the same time as you pay your tax.
If you live outside the UK
After you’re due to start repaying your loan, if you are travelling or living abroad for more than 3 months, you will need to tell the Student Loans Company (SLC). They will work out what you have to repay while you’re abroad. Be sure to keep your account details up to date, or you may be charged penalty interest rates and charges.
Budget for repayments
It’s a good idea to set and keep to a monthly budget to reflect your income and outgoings, including your student loan repayments (even if they are deducted automatically before you receive your salary).
Student Loan Repayment Calculator
If you are struggling with repayments
Keep track so you don’t overpay!
Many graduates have student loan repayments deducted from their salary automatically via PAYE, and for most the system works well. But thousands of graduates accidentally overpay their debts (in the worst cases up to £10,000) e.g. where repayments are collected too early, when their income is below the threshold, or after the loan has already been cleared. Problems occur mainly because HMRC only reports payments once annually to the Student Loans Company at the end of the tax year, by which time a large sum of overpayments could have been made. The Government plans to fix the system, but do be proactive and regularly check your payments, particularly if your circumstances change, or you’re close to clearing your debt.
Check your repayments and balance on your SLC online account.
If you think you have overpaid, you can apply for a refund online or call SLC: 0300 100 0611
Impact on Credit Rating & Future Borrowing
Your student loan is not included on your credit file, so it will not affect your and should not impact future borrowing.
However, it might affect mortgage deals, because lenders carry out affordability checks to assess what level of mortgage repayments you could manage on your take-home pay; therefore, they will take into account all your monthly outgoings, including student loan repayments.
‘I had only £6000 remaining on my student loan. A major lender offered me £87,000 mortgage with my student loan in place, or £102,000 if I paid off my loan first!’
(Beth in Sheffield)
Postgraduate loans are available throughout the UK, although the amounts and rules for eligibility vary, depending on where you are studying: England, Scotland, Wales, or Northern Ireland.
In England, postgraduate students can apply for a loan of up to £12,167 for a Masters degree (2023-24), to help with course fees and living costs. The interest rate charged on loans is normally based on the Retail Price Index (RPI) measure of inflation, set at RPI +3%. It will usually change each September, based on the RPI from the previous March. However, now that inflation is running high, the Government have currently capped the student loan interest rate at 7.3%.
Just like your undergraduate loan, repayments are income-contingent – you only repay if/when you’re earning enough once your course ends. The repayment threshold is £21,000, and you repay 6% of your annual earnings over this threshold. Any remaining debt is wiped after 30 years. If you already have an undergraduate student loan, you will repay both at the same time.
Find out more about postgraduate funding:
Funding for Postgraduate Study – GOV.UK
Masters, doctorates, teacher training etc.
Find out more about all types of student loans:
Repaying your Student Loan – GOV.UK
How repayment works, current interest rates & other FAQs
Log into your SLC account to update your details, check your balance owing, make a payment etc.