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
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 Loan 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 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.
Note: Figures relate to student loans taken out since September 2012 (Plan 2).
The repayment system is the same throughout the UK, but some different rules apply to Scotland and Northern Ireland. Click here for more information and other loan types.
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) for courses starting in 2019 will remain at £9,250.
The interest charged on student loans is linked to inflation. For the academic year 2019-20, the interest rate will be 5.4% (while you’re studying) and then between 2.4 – 5.4% (depending on your earnings).
You can get additional student finance to help towards your living costs at university/college; however 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)
Contact the Student Loans Company:
To update your personal details e.g. when you leave university
To update your employment information or tell them you’re going abroad (for over 3 months)
For any enquiries concerning your loan
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.’
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 on how much you earn. Interest rates are also staggered according to income. Whilst this does mean high earners could end up paying back far more than they borrowed (because of interest charges), it also means if you don’t earn enough, you don’t need to repay.
When to repay
You don’t have to start paying back your student loan until you earn £25,725 a year (£2,144 a month or £495 a week).
The earliest you begin repayments is the April after leaving university/college.
Even after you start repaying, if your income drops below £25,725 in any year, you can stop repayments (unlike normal borrowing, where you must continue regardless of your circumstances).
(This repayment threshold will rise to £26,575 from April 2020).
Repayments are proportionate to earnings – you repay 9% of everything you earn above the £25,725 threshold.
If you earn £24,000 per year, you repay nothing.
If you earn £29,725, that’s £4,000 above the threshold, so your repayment will be 9% of £4,000 = £360 per year, or £30 a month.
If your income falls, so do your repayments.
This staggered repayment system means that some graduates could be paying back their loan into their 40s and 50’s.
Monthly loan repayments related to income
Any unpaid student debts are wiped after 30 years.
However much is still owing, your repayments stop, and it’s estimated that around 83% of graduates will not pay back the full amount they borrowed. The system is designed so that only the very highest earners repay their total debt.
You can check your repayments and balance in your online account or your annual statements from SLC.
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.
Interest on Your Loan
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! Your repayments are calculated on how much you earn, not how much you owe (your outstanding loan + interest charges).
How it works
Interest rates on student loans are linked to the Retail Prices Index (RPI) measure of inflation and are reviewed annually. Your outstanding loan amount accrues interest during university and after graduation.
For academic year 2019-20:
While you’re studying, and until the April after you have left university: interest is charged at RPI + 3% (= 5.4%).
From the April after graduation, charges are staggered according to income.
From April 2020, graduates earning under the £26,575 repayment threshold will be charged a basic rate equivalent to RPI inflation (= 2.4%). Then interest is charged on a sliding scale, up to the maximum rate of RPI + 3% (= 5.4%) for people earning £47,835 or more.
The Institute for Fiscal Studies (IFS) calculates that the average student 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.’
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 the top interest rate (RPI + 3% = 5.4%) regardless of your income, until they have all the details they need.
Interest rates are linked to inflation
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 – July 2019
2.1% CPI Consumer Prices Index
2.8% 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.
If 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), there is no real cost of 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.
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 £25,725).
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 charged around the maximum interest rate and are set to pay off their loan within the 30-year period. 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 £25,725 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 £25,725 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).
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
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 now 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 £10,906 for a Masters degree (2019-20), to help with course fees and living costs. Interest will be charged at RPI + 3% (= 5.4%).
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.
Government Review on Student Financing
The Government has recently completed a full review of student financing and university funding. Proposals include lowering tuition fees and interest charges, reintroducing maintenance grants, changes to repayment rules and redirection of funding.
Find out more about the recommendations:
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.