Student loan repayments
Each year around 1.5 million students in the UK take out a student loan, but repayment is an issue that causes a lot of confusion. If you have taken out a student loan (or are planning to) it pays to be informed about how and when you’ll be required to pay it back.
In this article, we cover the answers to some of the most common questions about student loan repayments.
The following information covers repayments for student loans taken from Student Finance England for studying an undergraduate degree course.
How much of my student loans will I have to repay?
Student loans are repayable, but you don't have to pay them back straight away and - depending on how much you earn throughout your career - you might not have to pay back everything you owe
In the UK, student loan repayments are made at 9% of your pre-tax earnings. But – and here’s the important bit – those repayments are only made on earnings that are above a defined earnings threshold.
You won’t make repayments on anything you earn below the threshold. So, if your total earnings are below the threshold, then currently you are not required to make any repayments at all. But you will still accrue interest.
What is the repayment threshold?
This depends on when you started university. If you have Plan 2 student loans, then the threshold for making the minimum student loan repayments is an annual income of £27,295. You'll be on Plan 2 if you started university between 2012 and 2022.
If you started uni in August 2023 or later, you'll be on the new Plan 5. This means you'll start repaying your student loan once you are earning at least £25,000.
For more in-depth information, you can find out more about the different plans and payment thresholds on the gov.uk website.
How much interest will be charged on my loan?
As with most loans, a rate of interest is charged on the money owed. This interest is charged as soon as you take out your loan, even while studying, and is usually fixed at 3% above the Retail Price Index (RPI) for Plan 2. As of September 2023, the interest rate on Plan 2 is capped at 7.3% until 30 November 2023.
For Plan 5, your interest rate will be fixed at the RPI so it will be slightly lower than Plan 2, but you'll be repaying your loan for longer.
Will I ever pay off my loan?
Until recently, the answer to this question was 'probably not'. Those who took out Plan 2 student loans will see their loans written off after 30 years, and the level at which repayments are set means that most will not have completely paid off their loans by that time. Government predictions suggest that only 27% of students who started university in 2022/23 with Plan 2 student loans will completely repay their loans.
This has changed with the introduction of Plan 5 loans. Although the interest rates on these loans are lower than for Plan 2, repayments start from a lower income level and the loans are written off after 40 years, not 30. As a result, those government predictions suggest that 61% of students who started university in 2023/24 with Plan 5 loans will repay in full.
Either way, the amount you repay is defined by what you earn. Once you graduate, if you are earning over the threshold, you will repay 9% of that income.
How do I make repayments?
If you are employed, usually you don’t have to do anything. Once you start earning over the threshold, your employer will deduct your repayments from your salary automatically.
However, if you are self-employed then you need to make repayments yourself when doing your annual tax self-assessment.
Can I repay early?
Yes, you can make extra repayments towards your loan in addition to the required percentage. There are no penalties for making voluntary payments.
However, student loans are not too expensive to pay back, when compared to other forms of borrowing. Your own personal circumstances will define what's best for you, but you might find you're better off putting the money into savings.
Remember, if you have any outstanding loan amount, you’ll still pay 9% of everything you earn over the threshold. So, voluntary repayments really only make sense if you can clear the whole loan.
What happens if I live abroad?
If you live abroad then your repayments are still made in the same way. The only difference is in the way some repayments are calculated, as some countries have higher or lower costs of living than the UK.
However, if you’re living abroad then you need to let the Student Loan Company (SLC) know, as repayments will not be automatically taken from your salary. You will be required to inform them how much you’re earning and provide evidence. A repayment scheme will be set up accordingly.
Will having a student loan affect my credit rating?
Student loans are not included on your credit reference file, so they won’t have any impact on your future ability to get a loan or mortgage.
Might I end up overpaying my loan?Yes, this could happen. And while you’ll get your money back it might take some time. This is because the loan repayments won’t be stopped automatically when you have paid off in full.
The best thing to do is set up manual payments when you get close to clearing your loan. This will ensure you don’t overpay. But remember, the onus is on you to keep an eye on how much you have left to repay.
Do I have to get a student loan?Getting a loan is not obligatory. And if you’re in the fortunate position that you don’t need one, you can simply pay your own way. Although with costs rising in recent years this applies to fewer and fewer students.
If you do need to borrow to pay for your university experience, a student loan is still an extremely cost-effective way to do it.