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 where and when you took out your student loan.
If you took out your loan in Northern Ireland, Scotland or in England or Wales before September 2012, the threshold is adjusted every year. At the moment, it’s £17,775.
If you took out your loan in England or Wales after September 2012, the threshold is currently £21,000.
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. But, if your salary goes down or you stop working, your repayments will drop, too.
Here's an example:
Let’s say you went to uni in England in 2013 and graduated in 2016. After graduation, you land a job with a starting salary of £19,000 a year. Your salary rises to £22,000 in year two and you do so well that it rises to £30,000 in year three. But, in year four, you decide to take a gap year and go travelling.
Here’s what your student loan repayments would look like:
Year 1 - (on £19k) : £0
Year 2 - (on £22k) : 9% of £1,000 (£22,000 less £21,000) = £90 per year, or £7 a month
Year 3 - (on £30k) : 9% of £9,000 (£30,000 less £21,000) = £810, or £66 per month
Year 4 - (on a gap year) : £0
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 where and when you took out your loan. If you study in Northern Ireland or Scotland, or you studied in England or Wales before September 2012, the current interest rate is 1.25%.
The situation is a bit more complicated if you took out your loan in England or Wales after September 2012.
While you’re studying and until the April after you finish your course, you’re charged the Retail Price Index (RPI) plus 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 £21,000, 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 £21,000 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 £41,000, it stops going up and you’re simply charged the RPI plus 3%.
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%. This is the same rate charged to those who studied in England or Wales after 2012 and now earn more than £41,000. 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.
In this case, 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).
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.