Student Finance

Understanding your Student Loan repayments

Your Student Loan will probably be the biggest amount of money you've borrowed in your life so far. But do you totally ‘get' the repayment terms you're signing up to? We're here to clue you up!
student loans companyIf you’re like half of all students, your loan agreement is a bit like your appendix: you know you’ve got one, but you’re not entirely sure how it works. And that's not a good thing!

With tuition fees set to rise each year until 2020 and interest rates now at their highest in years, your Student Loan debt is fatter than ever. It’s easy to ignore the details when it comes to debt, but the reality is that the Student Loan isn’t as complicated (or as scary) as you might think – despite those numbers you see on your Student Loan statement.

We’ve scoured the small print and broken it down into manageable chunks, meaning you can skip to the bits you need and then get on with your life.

This page is for UK and EU students who started university any time after 1998 and used Student Finance to pay for it.

Do I have a Plan 1 or Plan 2 Student Loan?

It depends on when you went to uni and which country gave you the loan (usually wherever you were living before you started studying – contact Student Finance if you're not sure).

We'll be referring to Plan 1 and 2 loans a lot. So before we dive into the nitty-gritty, double check whether you're a one-er or a two-er.

  • I got my loan from England or Wales: If you got it in or after 2012, you’re on Plan 2. If you got your loan before 2012, you’ll make repayments under Plan 1.
  • I got my loan from Scotland or Northern Ireland: You’ll make repayments under what’s called Plan 1.

Is student debt like other debt?

don't worry clockCredit: Coolstock – Flickr

The news always seems to be full of stories about huge student debt and astronomical interest rates, but what no one tells you is that the Student Loan isn’t like other kinds of debt. Here's why:

  • If you took out a Tuition Fee Loan (for course fees) or a Maintenance Loan (for living costs), the total amount you borrowed is your Student Loan. Unlike grants, bursaries and scholarships, loans have to be repaid. However, you don’t start paying back your Student Loan until the April after you’ve left your course AND are earning above a certain amount
  • You then repay 9% of whatever you earn above the income threshold (which will be £21,000 until 2020 for those on Plan 2, and £17,775 from April 2016-2017 for those on Plan 1)
  • If your salary goes up, so do your repayments – but if you earn less than the threshold at any point, repayments stop until you’re earning back over the limit
  • There are no fees to take out a Student Loan, but interest is added to anything you borrow
  • Repayments are usually taken automatically from your salary before you get paid, you can’t accidentally skip instalments (which also means no late fees or debt collectors either). However, penalty charges can incur if you avoid paying what you owe – the idea that you can ditch your loan by emigrating is just one of the many urban myths of tuition fee repayments!
  • If you’re self-employed, you pay through your annual tax return
  • The debt is wiped 30 years after graduating, no matter how much you've paid back (it may be wiped sooner or later than this if you're on Plan 1)
  • The Student Loan also doesn’t affect your credit score – the infamous number that decides how generous lenders will be to you (like when you apply for a credit card or a mortgage)
  • You can make extra repayments or pay off your whole loan any time you like – but should you? Well that's what we're here to help you decide!

Our very own student finance expert, Jake Butler, says:

There's been a few appeals to the government to label Student Loans and their debt as something more like a graduate tax. The truth is that the majority of students under the new loan system will simply pay 9% of anything they earn over £21,000 per year for 30 years after they graduate, regardless of the size of their debt or the interest being added to it.

This sounds more like a tax than a debt, right?

Note: while there are lots of positives about the loan, its major sticking point is the government playing fast and loose with the terms – including changing them once you’ve signed up. That’s another reason to make sure you keep on top of your loan. We’ll keep this page updated, so make sure you bookmark it!

How is Student Loan interest calculated?

You might have seen a lot of hoo-ha in the news about the government increasing the interest rate on Plan 2 Student Loans to 6.1%. This is true, but while we're against the principle of students being burdened with extra debt, there is a very important point to stress: the added debt is essentially meaningless.

As the debt is already so big, and the repayments so small, the chances are that you'll never repay the full amount anyway. The IFS (the Institute of Fiscal Studies) estimates that 77% of students will have some or all of their debts paid for by the government, so adding more interest to the pile is a bit of an empty gesture.

What is RPI?

RPI (the ‘Retail Price Index’) shows how much prices have risen (or dropped) across the UK in the past 12 months. Student Loan interest rates are based on RPI and, as RPI can go up or down, interest rates can too.

Since RPI also reflects things like how much wages are worth, they do kind of balance each other out – so you’re not really paying more money for less loan.

Unfortunately, the other side of the coin is that this also means students are slightly worse off when the Maintenance Loan amount or the repayment threshold doesn’t also rise in line with inflation!

Anyway, pep talk over – now down to the details. Interest starts building from the day you take out your loan (so yes – even while you’re studying), and carries on multiplying until the day you clear your balance. You’ll repay more than you borrow, but that’s just how interest works, unfortunately. That said, there’s slightly more to it than that because of a little thing called RPI.

The role of RPI in your Student Loan interest will depend on the type of loan you’re on. Check out the interest rates for Plan 1 and Plan 2.

See how much interest your loan will cost you with our Student Loan repayment calculator!

Plan 2 Student Loans explained

plan 2 loan

Arguably, students who took out loans after 2012 in England and Wales get the stabby end of the stick. Not only do you pay more in fees, but you can also be charged much more in interest. No fair!

What are the interest rates?

Confusingly, interest rates for Plan 2 loans can vary quite a bit. And to really keep you on your toes, it varies by two different types of circumstance.

While studying, and until the April after you’ve left your course, it’s RPI plus 3%. So in 2017/18, you’ll be charged 6.1%. Remember though, this figure changes every September!

After graduating, it’s RPI plus a linear scale from 0-3% depending on your earnings:

  • If you earn £21k or less, it’s just RPI.
  • If you earn over £21k, it’s RPI plus a percentage up to 3%. This added percentage will start low and rise in line with whatever you’re earning. It stops increasing when you start earning £41k+, at which point it caps at 3%.

As an example, if you earn £31,000 (halfway between £21k and £41k) the interest applied to your loan that year would be RPI + 1.5% (1.5% being half of 3%).

In the simplest and least number-y way possible, this means that the higher your income, the more the loan will cost you in interest until you pay it off.

Note: If you don’t reply to SLC when they ask for information or evidence, they’ll lump you with RPI + 3% no matter how much you earn. It can literally cost you if you’re not on top of this stuff!

How much are repayments?

You’ll only start making repayments in the April after you’ve graduated. Even then you’ll only have to start repaying if you’re earning over the threshold.

The earnings threshold for Plan 2 loans is £21,000/year (or £1,750/month or £404/week) before tax. Earn less than that in taxable income (wages, freelancing, tips etc.) and you won’t pay a penny towards your loan until you’re back above the threshold.

It’s worth being aware that the government retrospectively changed an important part of the terms of these loans (we know, crazy) so that the £21,000 threshold will remain static until 2021, instead of increasing in line with average earnings.

Once you earn more than the threshold, repayments kick in and you pay 9% on the amount over £21,000. So if you earn £25,000, you’ll pay 9% of £4,000 – which is £360/year.

Here’s what your monthly repayments could look like. If you’re self-employed, use this as a guide to how much you should be putting away for your annual tax return:

Yearly salaryPlan 2 monthly repayments
£15,000£0
£18,000£0
£22,000£7
£25,000£30
£30,000£67
£40,000£142

Because repayments come with monthly and weekly limits as well as an annual figure, you could find a bonus or extra shifts pushes you above the threshold temporarily. Don’t worry – if your income drops after that, your repayments will too (get on to the Student Loans Company if not).

Could the loan be written off?

If the loan is ‘written off’, that means you no longer have to make payments towards it – even if you haven’t paid it all back!

Plan 2 loans are written off 30 years after you become eligible to repay, or if you receive a disability-related benefit and can no longer work (or if you die, but let’s keep this light).

Find out how much of your loan you’re in line to repay with our Student Loan Calculator.

What does my Student Loan statement mean?

Every so often the Student Loans Company send out a Student Loan statement to every student/graduate and we receive loads of worried emails and messages. There’s a lot of scary (big) numbers involved on the statement, as well as a lot of confusion about what it all means. Here’s our breakdown to put you at ease:

We’ve numbered the statement above to help explain what each part means. Let’s assume that this student started a three year course in September 2012 and graduated in 2015.

The statement is up to 5th April 2017 so the student would have been a graduate for two years by this point.

  1. Opening balance

    This student didn’t start studying until September 2012, so on April of that year the opening balance would have been £0. On the next statement (April 2018) the opening balance will be the closing balance from this statement (which is £42,737.51).

  2. The total loans borrowed

    £37,502 was the total borrowed over the 3 years of study, but this number could be much more or less for you depending on where you studied, what your household income was (and so on).

    We can assume that this student borrowed £9,000/year to pay for their tuition fees and an average of £3,500/year in the form of a maintenance loan to cover living costs. In future statements this number will be £0 as the student has graduated and won’t be borrowing any more.

  3. Total interest applied

    Alongside the total amount borrowed, this is perhaps the most scary number for most students. The interest applied is explained above as well as in our big fat guide to student finance.

    We can see that the interest applied is much more than the repayments made, and this is something that the majority of students will see on their Student Loan statement. The good news is, you shouldn’t let this number worry you too much.

    Remember that the interest has no bearings on how much you pay back. You always pay 9% of what you earn above the repayment threshold no matter how large your debt or interest amount is!

    The truth is that the majority of graduates (unless you’re a very high earner) won’t pay back their full loan before it’s wiped 30 years after graduating. If we take an extreme (and basically impossible) example, the interest amount added to your loan could be £50 million on your statement, but you’ll probably never get round to paying back even a penny of it.

  4. Total repayments

    As we know, graduates pay back 9% of anything they earn over £21,000 from the April after they graduate. This statement is showing repayments of just £18 which is 9% of £200. This means we can assume that this graduate has a current wage of £21,200 per year.

  5. Closing balance

    This is calculated by adding the total borrowed + the interest – the total repayments. Just as you shouldn’t let the interest get you down, this amount is largely irrelevant to most graduates as there’s a good chance you’ll never pay it all back.

Plan 1 Student Loans explained

plan 1 loan

Did you take out your loan between 1998 and 2012 (or since 1998 in Scotland or Northern Ireland)? Congratulations, you got a bit of a plum deal!

If you were lucky enough to have a bite at lower tuition fees – plus non-repayable grants and other free cash – you’ll have borrowed much less than those on Plan 2 style loans. Oh, and you’ll have gained less interest on it, too.

Plan 1 does have one downside though – your monthly repayment will be more than those who graduated under the new system (we’ll explain why).

What are the interest rates?

The interest rate for plan 1 loans is set by the Department for Education (DfE) each year, and is always set at whichever rate is lowest: RPI, or the Bank of England base rate + 1%.

Right now, the Bank of England base rate is 0.25% while RPI is 1.6% – so the current interest rate is 1.25%. You can see interest rates for previous years on the Student Loans Company website.

How much are repayments?

You’ll only start making repayments once you’ve left your course and are earning enough.

The earnings threshold for Plan 1 loans is £17,775/yr (or £1,481/month or £341/wk) before tax. This threshold has risen in April of each year since 2012, so make sure you keep up to date with the figure. Earn less than that in taxable income (wages, freelancing, tips etc.) and you won’t pay anything back until you’re back above the threshold.

Once you earn more than the threshold, repayments kick in and you pay 9% on the difference. So if you earn £25,000, you’ll pay 9% of £7,225 which is £650.25 for the year.

Here’s what your monthly repayments could look like. If you’re self-employed, use this as a guide to how much you should be putting away for your annual tax return:

Yearly salaryPlan 1 monthly repayments (6th April 2017 – 5th April 2018)
£15,000£0
£18,000£2
£22,000£32
£25,000£54
£30,000£92
£40,000£167

Because repayments come with monthly and weekly limits as well as an annual figure, you could find a bonus or extra shifts pushes you above the threshold temporarily. But don’t worry – if your income drops after that, so will your repayment (get on to the Student Loans Company if not!).

Could the debt be written off?

If the loan is ‘written off’, that means you no longer have to make payments towards it – even if you haven’t paid it all back!

Plan 1 loans can be written off if you receive a disability-related benefit meaning you can no longer work (or if you die, which you hopefully won’t). They also run out after a certain number of years, depending on when and where you took out the loan:

  • I got my loan from England, Wales or Northern Ireland: If you took out a loan in or before the 2005/06 academic year it will be cancelled when you turn 65. If you took out a loan after that, it’s written off 25 years after you became eligible to repay (the April after you graduated).
  • I got my loan from Scotland: If you took out a loan in or before the 2006/07 academic year, it’s cancelled when you turn 65. If you took out a loan after that, it’s written off 35 years after you became eligible to repay.

Find out much of your loan you’re in line to repay before it’s written off using our Student Loan Calculator.

What does my Student Loan statement mean?

Plan 1 student loan statement

We’ve numbered the statement above in order to go explain what each part means. This student will have already graduated and is most likely a few years into making repayment by this stage.

Their statement shows what happened during the previous year.

  1. Opening balance

    This amount is the total loan that the graduate started with at the beginning of this statement period. This will be the total amount they borrowed + interest – repayments (if any).

  2. The total loans borrowed

    Obviously this student has already completed their studies so won’t be borrowing anything for the rest of their statements.

  3. Total interest applied

    The interest applied is explained above as well as in our big fat guide to student finance.

  4. Total repayments

    During the year (6th April 2015 – 5th April 2016) this graduate will have paid back 9% of anything they earn over £17,335 (don’t forget this number goes up each year). This statement is showing repayments of just £234, which is 9% of £2,600. This means we can assume that this graduate was on a wage of £19,935 during that year.

    The more eagle-eyed among you will have noticed that the repayments made were less than the total interest added that year. This isn’t always a bad thing, as the loan is eventually written off anyway.

  5. Closing balance

    This is calculated by adding the total borrowed + the interest – the total repayments.

What happens to your Student Loan if you move abroad?

GlobeCredit: Mark Doliner – Flickr

There are no fees for taking out a Student Loan. Penalty charges only kick in if you do a Gary Barlow and try to avoid paying what you owe. The idea that you can ditch your loan by emigrating is just one of the many urban myths of tuition fee repayments!

In reality, Student Finance will find you and make you pay. Not in a ‘Liam Neeson in Taken’ sense, but they will want their cash back.

The short story is: the loan’s fairly flexible. You don’t pay if you don’t earn enough, and you can overpay whenever you want – but you can’t skip repayments if you’re earning enough to be making them.

Your loan contract doesn’t stop if you leave the UK! If you move to another country you’ll need to let the loan company know so they can adjust your repayment plan.

Should I try to pay my Student Loan off early?

Clock

If you’re thinking ahead, you may have realised that when you’re old enough/earning enough to be thinking about kids, cars and mortgages, you could also be making the biggest repayments.

You’d probably think that means it’s better to pay off your loan ASAP, but hold fire! Here are a few reasons to think carefully before repaying your Student Loan early.

  1. It could get written off before you’re done paying

    We can’t stress it enough – very few students will ever pay back the full amount that they owe.

    If there’s a write-off windfall out there, stretching yourself financially to pay it back when you don’t need to could be throwing money away.

    You never predict exactly how much you’ll earn in the future, but there are some useful rules of thumb. If you’ve got the qualifications and gumption for a very high-paying career, paying off your loan early could save you money (as you’ll have less interest to fork out on).

    If not, make the most of the manageable loan terms by using spare cash to build your own savings pot elsewhere.

  2. Repayments are manageable

    Right at the top of this guide we said that the Student Loan is one of the better borrowing deals out there, and we stick by this.

    If the loan had came from a commercial or private lender instead, you could be landed with big fat arrangement fees, hefty penalties for missing repayments, as well as interest so high it comes with a parachute.

    Banks and commercial lenders would also expect to get paid no matter how little you earn, but Student Loan repayments are based entirely on what you can actually afford. This makes the repayments so manageable that most graduates don’t even miss the cash that comes out their monthly pay cheques to cover it.

  3. You can put your cash to better use

    You’ll probably never have terms like this again, so the key is to make the most of them.

    Rather than using any extra cash you have to pay your loan off early, you could make it grow in a savings account, invest it, or even put it towards a mortgage!

    The Student Loan is the least pressing of all debts, so you’d be better off using any additional cash to help pay off more expensive debts like credit cards.

  4. You can’t ask for it back

    If you’re charged more than you should be for your income, you can ask for a refund (call SLC on 0300 100 0611).

    But if you choose to overpay, you can’t get the cash back if you change your mind. It also makes no difference to your monthly repayments, as they’re based on your current income, not what you owe.

    Imagine you overpay, but later find yourself skint and needing to borrow more money from another lender. It’ll probably cost you much more than what you’ve saved on your Student Loan.

    Be very sure you won’t need the cash again before overpaying!

  5. It won’t affect your credit score

    As we said earlier, your student loan won’t affect your credit score. However, what it can have an impact on is your affordability check.

    An affordability check is carried out by a mortgage lender as well as a credit check, and it’s designed to assess how much you can realistically afford to pay each month. They look at your incomings and outgoings, and as your student loan is a regular outgoing, it will leave you with less money to spend.

    That said, the impact of your student loan on an affordability check will be minimal as the repayments are such a small percentage of your overall income.

But the terms aren’t set in stone

We keep banging on about this, but it’s worth a drum solo: Student Finance terms aren’t set in stone. If anything, they’re more like water-soluble crayon.

While they’re decent enough right now, the terms can change at any time – and that could be the deciding factor in when to clear your loan.

5 things to do BEFORE repaying your Student Loan

  1. Check your Student Loan statement and make sure you haven’t been wrongly over-charged. If you have, ask for a refund (and put the money to better use!).
  2. Get to grips with tax (our cheat sheet can help) because only taxable income counts towards the loan threshold.
  3. Squirrel money away independently instead – look for savings rates higher than the loan interest and max out your allowances (don’t forget any tax-free allowances, too).
  4. Start saving for a mortgage or pension. They might seem years away but the earlier you start, the less you have to put away each month to hit the same pay-off.
  5. If you’ve got more expensive debts (credit cards, mortgage, payday loans), compare any fees for overpaying and think about paying them off first if it saves you money in the long run.

If you’re not sure which option is best for you, or you’re struggling to get your head around the sums, ask for help. Try your university’s student money adviser or look for an independent financial adviser.

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