The Break Down: Student Loans
If you're reading this, the chances are that you have a student loan. Over a million students take out a loan for studies at university each year. But despite this there is still uncertainty about the process of repayments, interest and why you never actually pay it all back. In this article we'll talk about the essentials you need to know about repaying your loan, in addition to giving you a look at the wider picture of students and what they mean in the UK.
What is a 'student loan'?
There are different types of student loans and you can work out which one you have here. For basic reference, English and Welsh students studying in the UK after 2012 are Plan 2 and Scottish students studying after 1998 are Plan 4. This article will mainly focus on plan 2 repayments. Generally speaking, when we say student loan we mean two things; your maintenance loan and your tuition loan. You'll have already taken these out if you're currently a student (and here's your reminder to reapply now for the next academic year).
Most courses in the UK have a tuition cost of £9,250, the full amount of which the government will lend you for your studies if you're a UK resident studying your first higher education course. Maintenance loans are offered at a minimum rate of £3,516 which increases if you live away from home, study in London or have a lower household income up to a maximum £12,382. Your tuition loan is paid directly to your University, whereas your maintenance loan is paid in segments to you each term.
How do I pay my loan back?
This is where it gets tricky. You are technically eligible to start repaying your loan the April after you finish your course or, if you're studying part time, the April 4 years after the course started. However, you only actually start making payments once you're earning over £27,295 a year (for plan 2.) This earning threshold decreases if you're plan 1,4 or doing a postgraduate degree. Your repayments automatically stop if your income dips below the threshold or if you are out of work for any reason and restart when you meet the requirements again. For plan 2, once you pass your repayment threshold you pay 9% of your earnings over that number. So if you're earning £30,295 annually you're £3,000 above the threshold and would pay £270.
However, even if you do consistently earn over the repayment threshold, it's impossible to say how much you'll pay back. This is due to a few factors, including changing interest rates and the nature of student loans. As with all loans, you are charged interest which increases the amount you are asked to repay the longer the loan is outstanding. With student loans, the interest you owe is subject to change. Your interest is decided by something called RPI inflation which is a broad way of saying how much prices rise each year. Inflation changes every year based on how much more expensive goods are now than this time last year. So if goods cost 2% more now than they did last year, then the RPI is 2%. While you're studying at university, you're charged interest at RPI + 3% (on plan 2) so if the RPI inflation is 2.5% that year, then you are charged a total interest of 5.5%.
Once you're eligible to repay loans, your interest rate will be dependent on your income. It will be purely RPI if you're earning under £27,295 and RPI + 3% once you earn over £49,130 annually. If you earn between these then you'll be charged on a sliding scale between RPI and RPI + 3%. These interest numbers are subject to change and will vary throughout the time you have the loan. The important thing to remember is that how much interest is added will never impact how much you pay back annually, only a change in income will. It can be easier to think of interest as just adding to the total amount you could potentially pay, which will only ever increase if your earnings increase.
So how much do I actually pay back?
Potentially nothing. It's important to differentiate between what you owe and what you pay. Student loan repayments are special because you only start repayments past a income threshold; if you never earn above it then you'll never pay anything back. That's why added interest doesn't necessarily mean you'll pay back more money - you'll only start paying more when you earnings increase.
This means that just because on paper you owe £50,000 that doesn't mean you will ever actually pay that back fully and unless you ever had an increase in income you could accumulate years of interest worth thousands of pounds and never actually pay any of it back. Additionally, your student loan is written off (cancelled) after 30 years by the government which is long before most would ever pay it back. You can make optional additional payments but this isn't recommended unless you're an extremely high earner.
How does my student loan affect me past university?
If you were paying attention to our first article about credit scores, then you may be questioning if your student loan could impact it. The good news is that this type of loan doesn't have any impact on your score so your repayments or any issues you encounter with it won't hurt you, but you should keep in mind that creditors may take it into consideration if you apply for a mortgage which can impact how much they lend you. Your student loan will be part of your life far beyond university, as your payments carry on for 30 years after the first April you were due to repay. This is also true of postgraduate loans in England and current plan 4 students, but varies for others.
An overview on student loans
The government predicts that by 2050, student loan debt will have reached over half a trillion pounds. This huge debt is only expected to be repaid by 25% of current undergraduates, meaning the Government never expects to make that sum back in full. Controversies over rising interest fees (which are currently above what most would pay on a mortgage) and rising concerns that the government may limit who can receive student loans with grade boundaries mean that the topic will stay in headlines for years to come. It's important to stay informed about changes even once you leave university as they can impact your finances for years to come. Most experts agree that it's best to pay off the minimum amount you owe once you're eligible (30% of students accidentally make repayments before they need to - but be aware that you can claim this back once you realise the mistake!) Knowing you won't have to pay back the full amount you owe before the debt is written off should mean that student loans aren't a source of worry for you, and additional resources on the subject can be found here.