Money

Repaying your student loan

We bring you everything that you need to know about repaying your student loan whether you are under the post or pre-2012 finance system.

If you are unsure about your student loan repayments then you aren’t alone. Over half of students in the UK admit to not knowing their full repayment terms.

The reality is that you will have to pay it back at some point. But how much do you have to pay? When do you have to pay it? And how much interest is charged?

All of these questions and more are answered in this simple to follow guide on student loan repayments.

Whether you started before the introduction of the new fees in 2012 or after, we’ll walk you through every step of the repayments.

What do you have to pay back?

Let’s start by looking at what it is you are actually paying back.

While you were at university you will most likely have taken out 2 types of loans:

  • Tuition Fee Loan – This is the loan to cover your tuition fee costs (costs vary between each university and course). Whilst studying, payments usually go straight to the university.
  • Maintenance Loan – This is the loan to cover your living costs. It it usually paid in 3 installments throughout the university year.

Both of these loans are added together and this is what you owe after graduating. Obviously the amount that students receive for either will differ in most cases depending on a large number of factors.

As a benchmark, students under the pre-2012 system leave university with an average debt of £21,000 and those under the new system leave with an average of £45,000.

Student grants, bursaries & scholarships do not need to be paid back and therefore are not added to your student loan repayments.

When did you start uni?

Pre-2012 Starters

If you started university in 1998-2011 then this is the student loan repayment system that you’ll be under (lucky you).

How much interest is charged?

The interest that you will pay on your loan each year is worked in September. The interest for the year is set at the lower value of the following:

  • pre 2012 student loan interestThe rate of inflation (RPI) based on the previous March
  • The bank of England base rate plus 1%

This year (2013) the interest is likely to be 1.5%.

When will you pay it back?

The good news is that you won’t have paid back a single penny whilst you are studying.

The even better news is that you won’t have to pay back anything once you have graduated until you secure a job that pays over £16,365  a year (figure correct in 2013 and will rise each year with inflation).

How much will you pay back?

As mentioned, under this finance system graduates will be required to pay back 9% of anything they earn over £16,365 (correct in 2013 & rising every year with inflation). If you earn under the current threshold amount then you will not have to pay back a single penny that year.

This table shows how much you can expect to pay back based on some example salaries.

Salary Monthly Repayments Yearly Repayments
£15,000 £0 £0
£16,000 £7.50 £90
£20,000 £37.50 £450
£25,000 £75 £900
£30,000 £112.50 £1,350
£40,000 £187.50 £2,250
£50,000 £262.50 £3,150

As you can see, the repayments are manageable.

NB: The repayments are calculated on a monthly basis so for example, if you earn over the monthly threshold for a few months of the year (due to bonuses or overtime etc.) then it will be taken as a student loan repayment. You can claim these payments back at the end of the year if you can prove that your yearly pay was under £16,365.

How do you pay it back?

how to pay back student loanEmployed: The best thing about repaying your student loans (if there is anything good about it) is that you don’t have to go through the hassle of repaying them yourself.

If you are in employment then the money comes straight out of your pay each month, similar to your tax, and you never see it. It will only appear as a payment on your pay slip. You pay what you owe each month to HMRC who then pass it on to the student loans company each year.

NB: If you are earning over the threshold and your employer is not making the payments then you need to make them aware as hefty fines are involved.

Self-employed: If you choose to take the self employment route after graduating then you will have to calculate for the repayments yourself when you submit your tax returns at the end of the year.

Make sure that you keep 9% of anything you earn over the threshold in your account so that you don’t get stung at the end.

Hungry for some extra info? Check out our extra tips to see more answers to student loan repayment FAQs.

2012+ Starters

The following student loan repayment conditions are for those that started in 2012 and after under the new £9,000 a year tuition fees.

How much interest is charged?

The interest under the new student loan system differs from the previous system as the amount of interest you are charged charged is set at inflation plus an additional interest rate.

2012+ Student Loan InterestThe calculation for inflation (RPI) is taken from the value in March each year for the following September and then added to the interest rate of up to 3%.

The amount of interest you pay on top of the inflation amount is calculated based on a number of factors shown below.

Whilst at University: You will pay the rate of inflation (RPI) plus an additional interest of 3% of any money you are borrowing throughout the total period while you are studying.

After graduating: Once you have graduated the interest to be added to RPI is worked out depending on what you earn.

The amount of interest to be added on top of inflation (max. 3%) is worked out on a sliding scale based on your earnings (between £21,000 and £45,000 a year).

For example, if you earn £20,999pa your interest will be set at just inflation, if you earn £33,000pa a year then interest will be RPI + 1.5% and if you earn £45,000+pa then your interest will be RPI + the full 3%.

This year (2013) the maximum interest rate is 6.6%.

When will you pay it back?

You will not have to pay back anything while you are at University. Repayments have to be made once you are earning over £21,000 per annum.

How much will you pay back?

As mentioned above, under the new student finance system graduates will have to pay back 9% of anything that they earn over £21,000.

This means that if you earn £22,000 a year then you will pay back just £90 of your loan each year. The good news is that if you earn below £21,000 in any year after graduating then you won’t have to pay back a penny that year.

The table below shows how much you can expect to pay back based on some example salaries.

Salary Monthly Repayments Yearly Repayments
£21,000 £0 £0
£22,000 £7.50 £90
£25,000 £30 £360
£30,000 £67.50 £810
£40,000 £142.50 £1,710
£50,000 £217.50 £2,610

You may notice that the repayment values are actually lower than under the previous student finance system. But, the downside is that you are likely to be paying it back for longer.

NB: The repayments are calculated on a monthly basis so for example, if you earn over the monthly threshold for a few months of the year (due to bonuses or overtime etc.) then it will be taken as a student loan repayment. You can claim these payments back at the end of the year if you can prove that your yearly pay was under £21,000.

How do you pay it back?

paying back student loanEmployed: If you are in full time employment then there is no need to worry about making any student loan repayments yourself as they should come straight out of your paycheck and therefore never enter your pocket.

The payment will appear on your payslip each month and if you cannot find it then you need to notify your employer as fines are involved for non payment.

You pay what you owe each month to HMRC who then pass it on to the student loans company at the end of each year.

Self-employed: If you are self-employed after graduating then you will know that at the end of each year you will need to file your own tax return.

In this return you will have to compensate for the repayments of 9% on anything you earn above £21,000 for that year.

NB: The government can change these repayment conditions at any time!

warningIt’s worth noting that under the new student loans agreement the government has stated that it may change the repayment conditions at any time.

Extra Repayment Tips

There are some additional points to consider when paying back your loans.

  • If you have savings – If you have savings or investments over £2,000 then any interest that you make on top of these savings will be counted towards your annual income.
  • Will it affect your credit score? –  The student loan is not included on any credit report so it won’t affect your ability to borrow money. If you want to check your credit score then you can do so with a free trial here.
  • Can you defer payments? – You cannot defer your payments at any point and you must pay 9% of anything that you earn over the threshold. In other words, you are allowed to overpay but you cannot underpay.
  • Never pay back early – You should never pay back more of your loan than you need to. The reason for this is that you will never be able to borrow money at these terms anywhere else. What’s more, you may never end up paying back the whole amount (depending on salaries).
  • What about if you go abroad? – The rumour that the debt is wiped after moving abroad is unfortunately not true. If you move to another country after graduating then you must inform the student loans company who will then make new repayment calculations depending on which country you move to. It’s similar to tax evasion…
  • Are repayments affected by tax? – Basically, tax and student loan payment are separate things calculated from the same salary figure. You are taxed on your income before the student loan is taken.

If you are still left confused about anything to do with the repayment of your fees then please leave a comment below and we’ll get back to you as soon as possible.

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