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Student loan repayments

Each year around 1.3 million students in the UK take out a student loan, but repayment is an issue that causes a lot of confusion. If you have, or are planning to take out a student loan, it pays to be informed about how and when you’ll be required to pay it back.

Here at The Uni Guide we have compiled this helpful Q&A telling you everything you need to know about loan repayments.

How much of my student loans will I have to repay?

Most people won’t ever have to repay all of the student loans they take out  This is because the amount you repay depends on both how much you earn in your subsequent career and where in the world you live. 

In the UK that means making repayments at 9% of your pre-tax earnings. But – and here’s the important bit – those repayments are only made on earnings that are above the 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?

As of 6 April 2020, the threshold for making the minimum student loan repayments is £26,575. This is not fixed permanently and may change over time. That’s why it’s always worth keeping up to date with student loan developments.

How much interest will be charged on my loan?

As with most loans, a rate of interest is charged on the repayments. This interest is charged as soon as you take out your loan, even while studying, and is fixed at 3% above the Retail Price Index (RPI).

The RPI tends to hover around the 2.3% mark, making the interest payments around 5.3% in total. 

However, these rates change once you graduate. If you earn less than the minimum repayment threshold of £26,575 then it matches the RPI at around 2.3%. It then increases on a sliding scale up to RPI plus 3% once you start earning above £47,835.

If you lose touch with the Student Loans Company (SLC) or fail to provide them with the information they require, you will be charged at the maximum RPI plus 3% rate. 

Will I ever pay off my loan?

You might be surprised to learn that most people never actually pay off their loan in full. When the interest is added to the outstanding loan amount, it is rarely matched by the repayment plan. 

In that sense, a student loan is more like a graduate tax, with those earning more paying back a greater percentage than those with lower salaries. 

Don’t worry too much though. If you haven’t paid back your loan after 30 years then the remaining balance will be written off. 

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. If you can earn more from savings after tax than the loan is costing you, you might be better off keeping it in the bank. 

Remember, if you have any outstanding loan amount, you’ll still pay 9% of everything you earn over the threshold. So, voluntary repayments 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 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. 

Can I overpay my loan?

The short answer is yes. 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 fees 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 the best and most cost-effective way to do it. 

More information from The Uni Guide on student finance

How student finance actually works

Bursaries and scholarships

What will you spend your money on at university?

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