7 min read

The beginner's guide to student loans

Hannah Salih
27 August 2019

There's no two ways about it, student loans are expensive and they're also pretty complicated. We (sadly) can't make them cheaper, but we can make it much easier to understand exactly how they work.

Whether you've just started university or you’re a few years out the other-side, your student loan is going to be with you for a while.

So it's worth getting to know how your loan works, but this can be pretty tricky with so many complicated terms and conditions attached. Here's your break down of the basics and the finer details that might have escaped your attention.

What you pay depends on what you earn

First things first, you’ll only have to start repaying your student loan once you start earning over a certain threshold.

The threshold depends on which loan plan you're on.

Plan 1

You're on plan 1 if you're:

  • an English or Welsh student who started an undergraduate course anywhere in the UK before 1 September 2012
  • a Scottish or Northern Irish student who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998
  • An EU student who started an undergraduate course in England or Wales on or after 1 September 1998, but before 1 September 2012
  • An EU student who started an undergraduate or postgraduate course in Scotland or Northern Ireland on or after 1 September 1998

The threshold for plan 1 is currently £364 a week or £1,577 a month.

Plan 2

You're on plan 2 if you're:

  • an English or Welsh student who started an undergraduate course anywhere in the UK on or after 1 September 2012
  • an EU student who started an undergraduate course in England or Wales on or after 1 September 2012
  • someone who took out an Advanced Learner Loan on or after 1 August 2013

The threshold for plan 2 is currently £494 a week or £2,143 a month.

The thresholds change on 6 April every year.

Repayments are automatically deducted from your salary, just like your tax, national insurance and pension contributions.

Once you reach the threshold, you pay 9% of anything you earn above it. The more you earn, the more you pay.

If your salary goes down, or you stop working, your repayments will be adjusted automatically.

Here's an example:

You're an English student who started Uni after September 2012. Your annual income is £28,800 and you are paid a regular monthly wage. This means that each month your income is £2,400 (£28,800 divided by 12). This is over the monthly threshold of £2,143.

Your income is £257 over the threshold (£2,400 minus £2,143). You will pay back £23 (9% of £257) each month.

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Interest starts from day one

Interest on your student loan starts accruing immediately. For your tuition loan, you’re charged interest from the day the payment reaches the university. For your maintenance loan, it starts on the day the money is deposited into your account.

The interest rate you’ll be charged depends on which plan you're on. If you're on plan 1, the interest rate is currently 1.75%.

The situation is a bit more complicated if you're on plan 2.

While you’re studying, interest is 6.3%. This is made up of the Retail Price Index (RPI) plus 3%. RPI is currently set at 3.3%.

Because your interest rate is linked to the RPI, it means when inflation goes up in the UK, the rate of interest you pay will also go up.

Once you’re in employment, interest will depend on your income. If you earn under £25,725, you’ll be charged the RPI only (you can see the current rate here). So even though you won’t be making any payments you’ll still be accumulating interest.

Once you reach the £25,725 threshold, you’re charged the RPI plus a percentage up to 3%. This added percentage starts low and rises as your income goes up. Once you earn over £46,305, it stops going up and you’re simply charged the RPI plus 3%.

Student loan interest is compounded
This means any interest you accrue is added to your loan and will also start attracting interest.

Watch out for penalty interest

This is something that trips lots of people up. The Student Loans Company tracks your income using your National Insurance number. So, they’ll know when you’ve gone over the threshold and have to start paying back your loan. However, you still have a responsibility to keep in touch with them.

If you don’t keep in touch, or if you fail to inform the Student Loans Company about changes to your circumstances, you’ll be charged penalty interest. This will continue to be charged on your remaining loan amount until you provide the required information.

Penalty interest is the Retail Price Index plus 3%. For this reason, it’s a good idea to look at the Student Loans Company’s terms and conditions carefully. That way, you can avoid penalty interest by always providing them with the information they need in the first place.

You can get hit with the charge for several reasons, including:

  • Changing your course, your college or your uni

  • Quitting your studies

  • Going to work abroad without telling them

  • Not notifying them of a change in personal circumstances, including getting married

  • Not notifying them that you’ve become self-employed.

    If you become self-employed, it’s worth keeping in mind that your student loan repayments will no longer be deducted automatically. You’ll need to start accounting for repayments in your self-assessment tax return and paying them to HMRC together with your tax bill and national insurance contributions.

Your student debt doesn’t appear on your credit report. But…

Since it’s not on your credit report, your student debt cannot affect your credit score. However, some lenders, particularly mortgage lenders, may ask about it as part of an affordability check.

Finally, there’s an upside

Usually, it’s a good idea to pay off your debts as soon as you can. However, student loan debt is probably the exception to the rule (especially since it doesn't affect your credit score).

You can repay your student loan early at any time by making a voluntary payment. But, according to Money Saving Expert, you’re usually better off saving that money instead.

What’s more, any outstanding debt - including interest - is wiped out if you don’t pay your student loan within 30 years from the April after your graduation date. So you don't have to worry about your debt being passed on to your future children if you fail to pay it off.

by Hannah Salih

Hannah reads all the finance info on the web so you don't have to. She knows all there is to know about your finances but still spends all her money on brunch. 

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