Your student loan explained

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The student loan. It can be the ultimate mystery. There’s a lot of confusion around the obligations: How much exactly must be paid back? What happens if you leave the UK?

Whether you’re heading off to uni next year, if you’re a current student, or a graduate – here’s our guide to what you need to know about your student loan.

What you pay

This will depend on which year you started university, as the system has changed recently.

If you started uni between 1998 and 2011

You repay 9% of everything earned before tax above £17,335 a year. So if you earn £20,000 in a year, you’ll pay 9% of £2,665, or £239.85. Read full details here.

If you started, or will start uni from 2012 onwards

You repay 9% of everything earned before tax above £21,000. So if you earn £24,000 in a year, you’ll pay 9% of £3,000, or £270. Read full details here.

In both cases, note that technically the threshold is calculated per month, so if you earn more one month than another, you’ll have to pay back extra that month.

Likewise, if you earn under the threshold in a month, you won’t pay anything. If you never earn over the monthly threshold, then you’ll never pay the loan back.

What’s the deal with interest?

Your student loan will accrue interest, but at different amounts depending on when you started uni.

Before 2012

The interest rate is set each August, and is whichever is lower out of:

  • The Bank of England base rate, plus 1%
  • The rate of inflation, which is subject to change each year

After 2012

It gets a little bit more complicated.

While studying the interest rate is the current rate of inflation plus 3% on the outstanding balance. This continues until the first April after graduation when it changes to:

After studying, whilst earning under £21,000, the interest rate is the current rate of inflation.

After studying, earning between £21,000 and £41,000, the interest rate will gradually rise the more you earn, from the current rate of inflation to the current rate of inflation plus 3%. For every £1,000 more you earn, you accrue 0.15% extra interest.

After studying, earning over £41,000, the interest rate is the current rate of inflation plus 3%.

How you pay

Any student loan taken out after 1998 is repaid through the payroll just like income tax and national insurance. This is calculated by your employer and taken out of your monthly paycheque.

If you’re self-employed then you’re responsible for calculating the amount of student loan you must repay via your self-assessment tax return. This must be sent off to HMRC once per year.

If you fail to pay, you’ll be sent a reminder. If you continue to fail to pay then you could be prosecuted.

Does it ever get wiped?

Yes! Your loan will be wiped:

  • Upon your death (sorry for the downer) so you don’t have to worry about passing it on to your next of kin
  • If you become unfit for work due to disability
  • A certain number of years after you graduate, depending on when you started uni:
The year you started uni The age at which your loan is wiped
1998 – 2005 When you reach age 65
2006 – 2011 Scotland: 35 years from the first April after you graduate

Elsewhere: 25 years from the first April after you graduate

2012+ England & Wales: 30 years from the first April after you graduate

Scotland: 35 years from the first April after you graduate

NI: 25 years from the first April after you graduate

What happens if I move overseas?

Although your repayments may be taken out of your paycheque like a tax, your loan is in fact a contract with the Student Loans Company (SLC). That means even if you leave the UK, the same repayment obligations remain.

If you’re away from the UK temporarily and miss payments, you can expect to be pursued when you return. If you leave for good then it is possible for the SLC to sue you for what you owe them in a foreign court.

Should I repay early?

It is possible to repay more each month than you’re obliged to. Or you can pay it all off in one go, if you want.

However, many graduates won’t ever earn enough money to repay the debt before it’s wiped, making it pointless to pay it back early. This is especially true for uni starters from 2012 onwards, who both have larger debts and more interest to worry about.

Even if you expect to earn enough to pay the loan off via your paycheque, you should check to see if you’d earn more interest on money in a savings account than will be added to your loan. If this is the case, it would make sense to pay it off in the smallest chunks possible at a time.

What about my credit score?

Having an outstanding student loan does not affect your credit score. However, some lenders may still ask for info on your loan through application forms.

This being said, as the repayments are taken directly out of your take home pay, bear in mind that this will affect affordability checks for mortgages.

 

Disclaimer: Information within this blog post has been sourced from http://www.studentloanrepayment.co.uk/ and http://www.slc.co.uk/. The content of this blog is for information purposes only, we do not accept any liability for the information published on these websites.