Students can borrow tens of thousands of pounds to fund their education, but when it comes to paying back student loans, the rules can be confusing.
What are you going to borrow?
“Student loans are a complex subject, and myths abound, so it is important that students understand repayments, their obligations and the implications for future loans,” said Paula Roche, the general manager of consumer solutions at Equifax UK.
That depends on the timing of your degree, but also on where you come from and where you choose to study.
English universities can charge home students up to £9,250 a year. Students in England can also take out a maintenance loan of up to £12,667 to cover their living expenses. The maintenance grants were discontinued in 2016.
Loans do not have to be repaid until after you graduate, but they accrue interest during your studies.
What is the interest rate?
Student loans accrue interest from the day the first payment is deposited into your bank account or to your university until it is fully repaid or canceled. Interest is calculated daily and applied to the balance each month, known as compound interest.
The rules depend on which repayment plan you’re on: there are four different ones, but if you’re an English or Welsh student, who started an undergraduate degree somewhere in the UK in the last decade, you’re on plan 2, so we’ve looked with this option.
While in college, the interest charged is usually based on the retail price index (RPI), a measure of inflation that includes housing costs plus 3%, but after graduation, the rate is tied to your earnings. The rate is usually set on September 1 each year based on the RPI of the previous month of March.
If you earn £27,295 or less, the interest charged is the inflation rate, but if you earn more, you pay a higher rate linked to your salary. It’s a sliding scale and borrowers reach the maximum rate of RPI plus 3% once they earn around £50,000.
In September, due to high inflation, plan 2 lending rates were capped at 6.3% for three months, and the government has recently confirmed that it will rise to 6.5% in December.
How much to pay back
Full-time students start repaying their loan through the tax system from April after graduation, but these automatic repayments only start once your income exceeds the threshold for your repayment plan, in this case £27,295 per annum.
This works out to a monthly salary of £2,274, or £524 per week, in the UK. If your income falls below that, the repayment will stop until your income is restored.
In Plan 2, students pay 9% of what they earn above £27,295, regardless of the amount of their debt.
It is possible to make additional repayments, but this is not recommended by financial experts. The government’s advice is to “think about your personal and financial circumstances and how they may change in the future” before doing so.
Borrowers are only allowed to make additional repayments if they expect to repay the outstanding balance in full at the end of the 30 years.
At the moment only about a quarter of students do this, although this figure is expected to rise as students in England will have to pay back student loans over 40 years from September.
Who does not have to pay back?
Graduates are not required to repay a loan if they earn less than £27,295, and the balance is amortized after 30 years. That means that someone who never earns more than this never pays back any of his loan.
A student loan can be discontinued for people who are unable to work due to illness or disability and are entitled to certain benefits, including Personal Independence Benefits, Disability Benefits, Disability Benefits, and Severe Disability Benefits.
It is also written off when a student dies. Family members must notify the Student Loans Company (SLC) and provide evidence such as an original death certificate and the person’s customer reference number.
What about tax?
Refunds are based on pre-tax income, but the money is withdrawn after the tax is paid. Someone with an annual salary below the £27,295 repayment threshold is not allowed to pay student loan contributions.
However, a refund may be deducted if income exceeds the weekly or monthly limits of £524 and £2,274 respectively, for example from working overtime or receiving a bonus.
Overpayments can be recovered at the end of the tax year by contacting the SLC.
What if you move abroad?
It is a myth that student loan repayments can be avoided by moving abroad. Anyone planning to move abroad for three months or more should contact the SLC, which will check what repayments are due and, if so, how much.
This only applies to people who work abroad, not for study, volunteer work or travel.
Graduates living abroad must pay the SLC directly instead of having money automatically deducted from their salary, through their online account or via international wire transfer.
Reimbursement rules are the same as in the UK, but there are different income thresholds for each country to reflect variation in the cost of living. For example, in the US the threshold is the equivalent of £32,755 and in Singapore £16,380.
Anyone who doesn’t give the SLC their income details will have to pay a fixed monthly payment instead of an income-based one, which could end up costing more per month.
British people who do not pay off their student debt during their stay abroad are building up payment arrears.
According to the latest government statistics, 54,700 college graduates were living abroad and paying back their loan — an increase of 8,700 people — but the number of borrowers who were in arrears increased by 1,500 to 49,500 in April.
Does it affect mortgages?
Student loans do not appear in the credit file and do not affect creditworthiness. However, it can still affect how much a bank is willing to lend to those applying for a mortgage as net pay is considered.
“The first thing to know is that paying back student loans doesn’t directly affect your credit score,” says Roche of Equifax UK. “They don’t show up on your credit report and don’t directly affect your ability to take out a loan in the future.
“This is because they are automatically deducted from the graduate income before the money is in your bank account, and this only happens if you earn more than the threshold amount.
“However, student debt accrued in other ways will show up on your credit report, for example, credit card spending, overdraft usage, and other personal loans, such as for a cell phone.”