Paying Back Your Student Loan

When you’re in your last year of university, you may be starting to worry about the amount of debt that you will have to pay back when your course finally comes to an end. This can cause sleepless nights for many, however the truth is that student loans aren’t anything to be afraid of.

In fact, many people never pay all of their loan back at all, and the amounts that they do pay are manageable. This guide will help you to deal with some of the questions that you might have about your loan, and this should mean that you are able to enjoy the rest of your course without the stress of your financial situation detracting from the experience.

What you pay back isn’t set in stone

Once you leave university, you will be sent a statement to say how much you owe on your loan. Depending on when you started your course, this amount will vary, and interest might be added on if that was in your terms. However, although your course has a price tag of a certain amount each year, this doesn’t mean that it will actually set you back that amount.

The amount that you pay back is based on how much you earn once your course is over.

If your course started before 1 September 2012, or you have a loan from the student finance agencies in Northern Ireland or Scotland, you’ll have a Plan 1 loan that you’ll pay back when you earn over £18,935 a year, £1,533 a month or £354 a week.

If you began your course after 1 September 2012 in England or Wales, you’ll have a Plan 2 loan. You’ll begin paying off your student loan when you earn over £25,725 a year, £2,144 a month or £495 a week.

This means that you should never find that the amount you need to pay back is unmanageable.

What will I have to repay exactly?

The amount you pay back is 9% of the income you earn over the repayment thresholds:

• £18,935 a year, £1,533 a month or £354 a week for Plan 1
• £25,725 a year, £2,144 a month or £495 a week for Plan 2.

Interest is added to your loan from the date of your first loan payment.

Plan 1

For example, earning £27,000 a year would mean you’re being paid £8,605 over the threshold. 9% of £8,605 is £774.45 a year, or £64.53 per month.

Interest on Plan 1 student loans

The interest rate is set on 1st September each year, although it can change during the year too. Currently the interest rate on Plan 1 loans is 1.75%

Plan 2

Under Plan 2, you’ll repay 9% of your income over the equivalent pay period earnings threshold. This means if you earn £2,250 per month (or £27,000 per year), you will repay £9.54 per month (that is 9% of the £106 that is ABOVE the monthly threshold of £2,144).

If you earn £2,500 a month (or £30,000 a year), you will repay 9% of the £356 above the relevant monthly pay period threshold (just over £32 a month).

In these examples, we have assumed that you are paid in 12 equal monthly payments.

Interest on Plan 2 student loans

When you’re studying, the interest on your loan is the UK Retail Price Index (RPI) plus 3%.

Once you have finished your course, the rate depends on how much you earn and varies between RPI for those earning £25,725 or less to RPI plus 3% for those earning over £46,305.

What happens if I have a Plan 1 and a Plan 2 loan?

You’ll begin paying back your Plan 1 loan when you earn over the annual threshold of £18,935 and below £25,725 a year.

You’ll pay back both towards both your Plan 1 and Plan 2 loans when you earn £25,725 or over.

The amount you repay will be 9% of the amount you earn that’s above the repayment threshold for the relevant pay period. By pay period we mean each time you receive your salary. This could be every week, four weeks, a calendar month.

How long will it take me to pay back my loan?

If you don’t earn very much over the threshold, you might find that your annual payments don’t even cover the interest that is added onto the amount that you owe. However, the good news is that you will not be in debt for the rest of your life, as the amount that you owe is cancelled after 30 years.

This means that if you start your course now, you will be debt free before you reach your mid 50s – even if you haven’t paid back the full amount.

When do student loan repayments start?

The earliest you’ll have to start repaying your student loan is 6th April, the year after you leave study from university or college.

Repayments only start once you’ve started earning above a certain salary. This depends on which loan you have.

Plan 1 loans will start being repaid once you earn over the annual threshold of £18,935 a year, £1,533 a month or £354 a week.

Plan 2 loan repayments start once you earn over the annual threshold of £25,725 a year, £2,144 a month or £495 a week.

You might have both Plan 1 and Plan 2 repayments to make, depending on when you started your studies. Read more about this on the Student Loans Company site.

How the Student Loans Company knows how much you’re earning

The Student Loans Company uses your National Insurance number to keep track of your income.

They’ll instruct HM Revenue & Customs (HMRC) to notify your employer when you start working, and payments will be deducted from your taxable earnings.

If your income falls below the starting threshold within a certain pay period, there won’t be a repayment deduction made for that pay period. By pay period we mean each time you receive your salary. This could be every week, fortnight, four weeks, or a calendar month.

Once the loan is paid off in full, HMRC notifies your employer and the repayments will stop.

However, if any payments slip through before your employer takes action, you’ll be refunded.

You should keep track of salary deductions and contact the Student Loans Company if you think you have paid back too much.

What happens if I can’t make the payments?

If you know that you have a loan to pay back, there is a chance that you might be starting to worry about what will happen if you can’t make the payments that are expected based on your earnings.

However, try not to worry, as the amount that you owe is taken from your wages beforehand, so you won't get the money anyway.

This means you should never be in a situation where you are in arrears with your loan. The only difference in this system occurs when you are self-employed (see below), where your repayments will be worked out when you submit your tax return at the end of each financial year.

For this reason, if you are registered as self-employed, it is important that you budget each month for all outgoings such as national insurance, tax, and student loan repayments.

Can I repay my loan more quickly?

You have the right to pay off your student loan more quickly by making single payments of £5 or more directly to the Student Loans Company whenever you want to, and you can do this even if your salary hasn't yet reached the starting level for repayments.

You also have the right to pay off your outstanding student loan in full at any time.

If you do make voluntary repayments, this will not prevent your employer from making the usual student loan deductions from your pay. However, it does mean that repayments will stop sooner.

Before making extra payments, you should consider first of all if you can make better use of this money to meet your budgeting needs now.

What happens for grants or scholarships that I was awarded?

If you were ever awarded grants or scholarships while you were studying your course then there is no need to worry, as you don't need to repay these.

If you living in a low-income household it is likely that a larger part of the money you were awarded was issued as a grant rather than a loan, which means that the amount that you need to repay will be lower.

It is important that you calculate how much of the money you are given you will need to pay back at a later date.

How will this debt impact my credit score?

When you graduate, you may feel as though the whole world is at your feet, and you will probably want to start doing things such as buying a house or a car, or considering other kinds of financial commitments.

In order to be able to do all of these things, it is vital that you have a positive credit score, or you may struggle to get finance from lenders.

It is common knowledge that debt affects your credit score negatively – however student loans do not count towards your credit score in any way.

This means that there is no way that taking out such a loan can have a negative impact on your financial future.

Will I be able to get a mortgage?

While a student loan won’t affect your credit score, it could still have an impact on your ability to get a mortgage – but only based on an affordability check. This type of check takes into account all of your income and outgoings, and works out the level of mortgage repayment that you could afford.

It is unlikely that your student loan repayments would be large enough to have any kind of major effect on this check, however it is always worth considering if you are trying to work out the likelihood that a bank or other lender will give you a mortgage.

Ultimately, although there is no getting away from the fact that your student loans count as a debt, there is no need to worry, as they will not have any kind of significant impact on your financial future. Basically, the amount that you pay back depends on how much you earn – so if your course wasn’t worth the money, you will never pay it back.

This means that you should try not to worry about your loan repayments, and instead focus on putting your efforts into improving your career prospects after graduation.

What happens if I live overseas?

If you’ll be overseas for three months or more and your repayments have already started, you will need to complete an Overseas Income Assessment Form which will work out how much you need to repay while abroad.

What if I become self-employed?

If you’re self-employed, HMRC will calculate what you owe each year in repayments, once you file your tax return.

Just make sure that you tick the box on your tax return which states that you currently have a student loan.

When will my student loan be written off?

Exactly when loans are cancelled varies depending on the loan you have and where you studied.

Plan 1 loans and Mortgage Style Loans varies a lot more in terms on when they are written off. Find out what would apply in your circumstances.

Plan 2 loans, which you’ll have if you studied in England or Wales and started your course on or after 1 September 2012, are normally written off 30 years after you started repaying it.

Find out more about when Plan 2 loans are written off.

Your loan is written off if you become permanently disabled or die.

If you can prove that you’re permanently unfit for work, then the Student Loans Company will also write off your student loan. The Student Loans Repayment site has the full details on how to prove this.

We recommend budgeting as best as possible so that you can manage your student loan repayments effectively.

Whether you’re due to start university or preparing to complete your studies in the near future, the moment will come when you’ll start to make student loan repayments.

Further information

For more tips and advice on student loans and finance, please see:

• Best Student Bank Accounts
• Student Finance
• Student Budgeting Guide
• Student Council Tax Guide
• Student Tax & National Insurance
• Student Budgeting, Money & Finance