Student Loan Repayment Guide
Once you’ve left university and are earning a certain amount, your Student Loan repayments will kick in. So, what’s the Student Loan repayment threshold and how do Student Loan repayments work? In this guide we’ll cover all there is to know about Student Loan repayments and whether it’s a good idea to repay the loan early.
What is a Student Loan?
A Student Loan covers your university tuition fees and living costs with the Maintenance Loan. Student Loans are repayable once you’re earning a certain amount of money. The loan accrues interest each year until it’s completely repaid.
But don’t let that scare you! Student Loans are written off after 30 years and 83% of graduates never fully repay the loan. For more information on Student Finance, read our guide.
What’s a Student Loan repayment?
A Student Loan repayment is what you’ll start paying once you’re earning enough money. It’s charged on your payslip each month much like tax is. You repay your Student Loan after university but you won’t start the repayments until you’re earning enough.
You’ll be repaying the following:
- Tuition Fee Loans.
- Maintenance Loans.
- Postgraduate Loans (if applicable.)
You won’t need to repay any grants or bursaries.
What Student Loan plan are you on?
Your Student Loan plan affects what your repayment threshold will be and therefore how soon you’ll start repaying your loan. There are two different Student Loan plans:
- Plan 1 - Students from England and Wales who got their loans before September 2012. Scotland and Northern Ireland students are also under Plan 1.
- Plan 2 - Students from England and Wales who got their loans after September 2012.
Plan 1 Student Loans explained
Plan 1 Student Loans are for students who started their course before September 2012. Scotland and Northern Ireland students are also under Plan 1.
The repayment threshold is when you’re earning at least £19,380 a year. You’ll repay 9% on any earnings above this threshold.
Interest on Plan 1 Student Loans is currently 1.1%.
Plan 2 Student Loans explained
Plan 2 Student Loans are for students in England and Wales who started their course after September 2012.
The repayment threshold is when you’re earning £26,575 a year. You’ll repay 9% on any earnings above this threshold.
Interest accrues on Plan 2 loans whilst you’re still at university. The interest rate is currently 5.6%.
When you start repaying your Student Loan
The majority of students are on Plan 2 Student Loans as they begin their course after September 2012. This means you won’t start repaying your Student Loan until you’re earning £26,575 a year or more.
Student Loan repayment thresholds
The Student Loan repayment threshold is £511 a week or £2,214 a month or £26,575 a year. You must be earning over these amounts before you start repaying your Student Loan.
These repayment thresholds ensure that you can comfortably afford to repay your Student Loan without it taking away a large portion of your income. If you never earn enough money to meet the threshold, then you’ll never have to repay any of your Student Loan.
What if my income changes?
Your Student Loan repayments will automatically stop if you stop working or if your income drops below the threshold. If they carry on, you can apply for a Student Loan refund. We’ll cover this in more detail later on.
How much do you repay?
How much you repay of your Student Loan is dictated by what you earn. The more you earn, the more you pay back. You won’t start repaying until you’ve left university and are earning more than £26,575 a year (£2,214 a month or £511 a week) before tax.
Once you’ve hit the threshold, you’ll start repaying 9% on the amount over £26,575.
Here’s a table to demonstrate the cost of Student Loan repayments:
|Annual Salary||Plan 2 Monthly Repayments|
If your earnings drop below £26,575 at any point, for example, you earn less than £2,214 one month, then the payments should stop. If they don’t, you’ll have to get in touch with the Student Loans Company.
How do I repay my Student Loan?
You don’t have to do anything to repay your Student Loan as it’s paid via PAYE like income tax on your payslip. You’ll be able to see how much has been deducted on your payslip.
However, if you’re self-employed you’ll have to make the repayments yourself after filling in your self-assessment tax form each year.
Will I ever pay off my Student Loan?
83% of graduates don’t clear their Student Loan in 30 years. 30 years after graduating, your Student Loan is wiped, no matter how much or how little you’ve paid off.
Student Loans work more like graduate tax than an actual debt you must pay off. Once you’re earning enough, the monthly repayments aren’t enough to cover the cost of both the loan and the growing interest.
There’s no need to worry though, the loan gets wiped after 30 years with no negative impact on your credit score.
How does Student Loan interest work?
You’ll be charged interest on your Student Loan as soon as you take one out, which might seem surprising. Whilst you’re studying at university, the interest rate will be 3% above Retail Price Index (RPI). RPI is currently around 2.6%, which means the interest rate on your Student Loan whilst at university will be 5.6%.
However, this interest rate changes once you’ve graduated. The amount of interest you’ll be charged on your Student Loan will depend on what you earn.
- Earning less than £26,575 a year - the interest added to your Student Loan will match the Retail Price Index (RPI) which is around 2.3-2.6%.
- Earning more than £26,575 a year - added interest will be the RPI plus a % up to 3%. The added % interest grows in line with your earnings. Once you’re earning more than £47,835, it’s capped at 3%. So, the most interest that will be added to your Student Loan is around 5.6%.
For example, if you’re earning halfway between £26,575 and £47,835, then the added interest will be the RPI plus 1.5%.
Essentially, the higher your income, the higher the interest rate on your Student Loan.
Student Loan overpayment refunds
You can claim a refund if you’ve paid your Student Loan when you didn’t have to. For example:
- You’ve overpaid more than the total cost of your Student Loan.
- Your annual income was below the threshold.
- You started repaying your Student Loan before you needed to.
You’ve overpaid more than the total cost of your Student Loan
HM Revenue and Customs (HMRC) tells your employer to stop taking Student Loan repayments from your salary once your Student Loan has been fully repaid. However, it can take four weeks for these salary deductions to stop.
This means that you can end up overpaying your Student Loan. Usually, the Student Loans Company will contact you to arrange a refund or will refund you automatically.
If you know you’ve overpaid but haven’t heard from the Student Loans Company then you can contact them and request a refund.
Your annual income was below the threshold
If you made repayments but your income for the tax year was less than:
- Plan 1 - £19,390
- Plan 2 - £26,575
- Postgraduate Loan - £21,000
If your annual salary is less than the above for your plan you may still repay your Student Loan. If, for example, one month your income is more than £2,214 (for Plan 2 Loans) then you might start repaying. However, your annual income might still be less than £26,575, so you shouldn’t be repaying your Student Loan yet.
You started repaying your Student Loan before you needed to
If a Student Loan deduction is taken from your salary before you’re due to start repaying, then you can claim a refund. For example, you start repaying whilst you’re still studying at university.
Student Loan repayment facts
Student Loan repayments can be confusing with many students stressed about having such a huge debt hanging over them. These three quick Student Loan repayment facts summarise why you shouldn’t be worried:
1. Student Loans aren’t like normal debt
Student Loans don’t work like credit card debt or loans. You won’t be chased by debt collectors and the loan doesn’t affect your credit score. You can’t miss payments and face repercussions as Student Loan repayments are automatically deducted from your salary and only when you’re earning enough.
Student Loans shouldn’t weigh on your mind like a debt. You won’t face consequences for not paying or clearing it in full.
2. If you aren’t earning enough money, then you don’t repay your Student Loan
Normal debt requires you to repay regardless of your financial situation. Thankfully, Student Loans work very differently. You don’t need to repay your Student Loan until you’re earning over the threshold of £26,575. Even if you’ve started repaying then your income drops, you’ll immediately stop repaying.
3. Student Loan debt gets wiped after 30 years
Student Loans are automatically wiped 30 years after graduation, no matter what your situation is. Also, if you die before 30 years, your Student Loan debt will be wiped. So, you don’t have to worry about your family having to repay your Student Loan.
If you haven’t repaid your Student Loan within 30 years, it’ll automatically be wiped.
Why you SHOULDN’T pay off your Student Loan early
Many students who have spare cash or are earning a lot of money consider paying off their Student Loan early. This isn’t a good idea. Other things are much more important you can spend your money on. Here’s why you shouldn’t pay off your Student Loan early:
Reason #1: You might end up borrowing money in the future
If you have enough spare cash to pay off your Student Loan early, you might need that cash in the future.
By blowing tens of thousands on your Student Loan, you might need to borrow that amount at a later date for a mortgage or buying a car etc. The interest rate on borrowing money in the form of credit cards, loans and mortgages is much higher than the Student Loan interest rate. You’ll also need to repay this borrowed money, no matter how stable you are financially.
It’s impossible to know what the future holds. So, paying off your Student Loan early leaves you vulnerable to needing to borrow in the future as you’ve spent your savings already on your Student Loan.
Commercial loans cost much more than Student Loans and you don’t have the security of only repaying when you’re earning enough. Keep your savings for the future!
Reason #2: You can spend your money in better ways
If you’ve got a decent amount of money, it’s better to put it towards an investment like a mortgage deposit rather than paying off your Student Loan.
It’s hard enough getting on the property ladder these days so don’t set yourself back by spending all your savings on clearing a virtually pointless debt like a Student Loan.
Instead, save that money and spend it on something better, like a mortgage. Even if you aren’t planning on buying a house anytime soon, it’s best to save that money towards it.
Reason #3: Pay off more expensive debts first
If you’ve got other expensive debts like credit cards and personal loans, then you should focus on clearing those first. The interest rates on these debts will be much higher than your Student Loan interest rate.
Also, these debts will affect your credit score whilst a Student Loan doesn’t. Focus on clearing expensive debts if you have any spare money.
Reason #4: Find a savings account with high interest
A good idea is to put money in a savings account that has a higher savings rate than your Student Loan’s interest.
This way you can maximise your savings and be comfortable that you’re making the most out of your money.
Want more information?
LatestDeals.co.uk has a money-saving guides section full of detailed information for students.