According to the UK Parliament, almost £20 billion is loaned to students each year in England, and individuals who took out student loans and finished their courses in 2020 have an average of £45,000 of debt to pay back.
Whilst this may seem daunting, student loans are unlike other forms of borrowing money in terms of loan repayment. Additionally, it is estimated that only 25% of current full-time undergraduate students will fully pay back their student loans.
Despite these factors, it is important to understand the contractual requirements of a student loan whether you are a prospective student or have now finished your studies.
If you are struggling to understand student loan repayment, this article is for you. We will cover what a student loan is, when and how you start paying off your student loan, and whether you should pay off your student loan early.
Student loans are available to help you fund tuition fees and living costs whilst studying on a higher education course. They are issued by Student Finance, a subsidiary of the Student Loans Company (SLC). Depending on the country of issue, your loan will be provided by Student Finance England, Scotland, Wales or Northern Ireland.
Student loans are divided into two categories:
- Tuition Fee Loan - a loan to cover the course tuition fees.
- Maintenance Loan - a loan to help cover the costs of living and accommodation whilst studying.
It is possible to apply for each individually or both.
Tuition Fee Loans are paid directly to the university to cover the cost of the fees - up to £9,250 if you are a full-time student in the UK.
Maintenance Loans are based on your household income and are paid directly to you at the start of each academic term. The amount you can borrow is as follows:
| 2021 to 2022 academic year | 2022 to 2023 academic year | |
| Living with your parents | Up to £7,987 | Up to £8,171 |
| Living away from your parents, outside London | Up to £9,488 | Up to £9,706 |
| Living away from your parents, in London | Up to £12,382 | Up to £12,667 |
| You spend a year of a UK course studying abroad | Up to £10,866 | Up to £11,116 |
| If you’re 60 or over on the first day of the first academic year of your course | Up to £4,014 | Up to £4,106 |
Source: gov.uk
If you decide to further your education, there are also Postgraduate Loans available to fund postgraduate courses such as a master's or doctoral degree. Unlike Tuition Fee and Maintenance Loans, these are paid directly to you and are not means-tested.
For many, the word loan has become synonymous with being in debt and as a result, individuals may be hesitant to borrow money. Student loan debt, however, is different from standard loan debt.
Here are a few of the ways in which a Student Loan is different:
- You will not pay back your student loan until you meet the minimum income threshold.
- Your repayment amounts are based on your income rather than the amount of money you borrowed.
- Your student loan does not affect your credit rating.
- Student loan repayments are automatically deducted from your salary.
- Student loans are written off at the end of your loan term. This is usually around 30 years but will depend on your repayment plan.
The first step to understanding how to pay back your student loan is to identify which repayment plan you are on. They are assigned to you based on your course level and start date, and the country that issued your loan.
The 4 repayment plans are as follows:
| Repayment Plan | Student Nationality/Country of study | Course Start Date | Course Level |
| Plan 1 | English or Welsh student studying in the UK | Before 1 September 2012 | Undergraduate |
| Plan 1 | Northern Irish student studying in the UK | On or after 1 September 1998 | Undergraduate or Postgraduate |
| Plan 1 | EU student studying in England or Wales | On or after 1 September 1998, but before 1 September 2012 | Undergraduate |
| Plan 1 | EU student studying in Northern Ireland | On or after 1 September 1998 | Undergraduate or Postgraduate |
| Plan 2 | English or Welsh student studying in the UK | On or after 1 September 2012 | Undergraduate |
| Plan 2 | EU student studying in England or Wales | On or after 1 September 2012 | Undergraduate |
| Plan 4 | Scottish student studying in the UK | On or after 1 September 1998 | Undergraduate or Postgraduate |
| Plan 4 | EU student studying in Scotland | On or after 1 September 1998 | Undergraduate or Postgraduate |
| Postgraduate Loan | English or Welsh student | On or after 1 August 2016 | Postgraduate Master's |
| Postgraduate Loan | English or Welsh student | On or after 1 August 2018 | Postgraduate Doctoral |
| Postgraduate Loan | EU student | On or after 1 August 2016 | Postgraduate |
If you took out an Advanced Learner Loan on or after 1 August 2013, you will be on Plan 2.
You become eligible to start making student loan repayments from the April after your course finishes, or four years after your start date if your course is part-time.
Additionally, the date you make your first repayment will depend on whether you meet the income 'repayment threshold'. As of April 6 2021, your income needs to be higher than the following (before tax and other deductions) to start making repayments on your student loan:
| Plan 1 (Northern Ireland) | Plan 2 (England and Wales) | Plan 4 (Scotland) | Postgraduate Loan | |
| Annual income | £19,895 | £27,295 | £25,000 | £21,000 |
| Monthly income | £1,657 | £2,274 | £2,083 | £1,750 |
| Weekly income | £382 | £524 | £480 | £403 |
gov.uk
What happens if my income changes during the year?
If your income changes during the year, so will the amount you repay - if you are employed then this will happen automatically.
If your income drops and you start earning less than the income repayment threshold, repayments will stop. On the other hand, if you earn over the weekly or monthly threshold at any point during the year, you will make a larger repayment. It is possible to request a refund at the end of the tax year if your income for that year was less than the annual repayment threshold.
Can I avoid paying back my student loan?
Although your student loan does not affect your credit score, by law you have to pay it back if you are eligible. Defaulting on repayments will negatively affect you when it comes to future financing options such as taking out a mortgage.
Also, remember you will not have to pay your student loan until your salary is above the repayment threshold.
As mentioned previously, your repayments are based on your income rather than the amount of money borrowed.
Once you have reached the income repayment threshold and you are on plan 1, 2 or 4, you will repay back 9% of your earnings that are over the repayment threshold. For a Postgraduate Loan repayment plan, you pay 6% of your earnings above the repayment threshold.
If you have both a Postgraduate Loan and a Plan 1,2 or 4 loan you will pay back both the 6% and the 9% if you are over the repayment thresholds.
More information and examples of each of the repayment plans can be found on the GOV.UK website.
Interest is charged from the day of the first payment of your student loan until the balance has been paid off entirely or cancelled. The interest is based on the Retail Price Index (RPI) which is a measure of inflation (the cost of living in the UK).
The interest added to your student loan differs according to the repayment plan you are on.
The interest rates are as follows:
- Plan 1 - 1.25% interest
- Plan 2 - 4.4% interest while studying (RPI plus up to 3%) until 5 April after you finish studying. Afterwards, the interest added is determined by your income amount are:
| Your annual income | Interest rate |
| £27,295 or less | RPI (currently 1.5%) |
| £27,296 to £49,130 | RPI (currently 1.5%), plus up to 3% |
| Over £49,130 | Usually RPI (currently 1.5%), plus 3% |
- Plan 4 - 1.25% interest
- Postgraduate Loan - 4.4% interest (RPI plus up to 3%)
Your student loan repayments are taken out of your salary and the method by which you will make repayments depends on your employment situation.
If you are employed in the UK, your repayments are worked out by HM Revenue and Customs (HMRC) and will be automatically deducted from your salary through PAYE, along with Income Tax and National Insurance. These repayments will only start being made once you reach the income threshold.
If you find that you are eligible to start repaying your student loan but no deductions are being made, it is your responsibility to notify your employer.
If you are self-employed, you are required to calculate your own repayments through the self-assessment tax form that is sent to HRMC. It is worth being aware that repayments cannot be made using a credit card so it will be important to factor this into your budget.
If you are both employed and self-employed, you will likely repay your student loan through self-assessment.
If you are planning to leave the UK for more than 3 months, you will need to notify the Student Loans Company (SLC) and arrange a repayment plan. The repayment thresholds differ per country however you will be notified by SLC how much you need to repay. Repayments can be made through your online account or by International Bank Transfer.
Coming to the end of your loan
If you are nearing the end of repaying your student loan, it is advisable to change over to Direct Debit for repayments. This is to avoid paying more than is required and having to get a refund.
The SLC will contact you as you enter the last two years of repayment to invite you to switch to Direct Debit. It is important to keep your personal details up to date on your online student loan account so they can do this.
Whilst it may seem like the obvious answer would be 'yes', and for most loans, this would be the case, not paying back your student loan early can actually be more beneficial.
Despite there being no penalty for paying back your student loan early, you may find that the extra money you pay back could be better utilised elsewhere. By not paying back more than you need to, you could avoid having to take out a more expensive loan later down the line. Also, as your student loan does not affect your credit score, saving your money and putting it towards a mortgage or something similar is often a better option.
If you do decide to contribute extra towards paying off your student loan, you will not be able to claim back any voluntary overpayments so you need to make sure you do not need that money.
Finally, it is always advisable to pay off your highest interest rate debts first. Seeing as student loans accrue interest at a rate of 1.25% to 4.4% which is much lower than most standard loans (the average for a standard loan is 9.41%), it is advisable to concentrate on other debt repayments first.