For many of us a student loan is the first taster into the world of financial debt. Being offered thousands of pounds is often seen as a gateway to helping you achieve your career goals and aspirations for the future.
The notion that you pay your student loan back when your wages hit a certain threshold, may seem great at first. However, it isn’t a loan that is ‘forgotten’ like many might often say. If you do not keep up with your loan payments when you are eligible to do so, then this can create some very worrying money issues.
In this guide we will look at what student loans are, how to pay off your student debt and what help is available if you find yourself in student loan debt.
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What is a student loan?
When most students decide to go to university, one of the first things they think about is how will they cover tuition fees, accommodation and living costs. Financing a life changing opportunity requires a lot of thought from students, especially those from disadvantaged backgrounds where parental support is not available.
A student loan is aimed at helping to reduce the financial pressure when entering higher education however, students shouldn’t be under the illusion that you don’t need to pay the money back. As soon as you graduate and start your working life, it will be your responsibility to pay the loan back. Before you can do this, let’s look at how a student loan works?
How does a student loan work?
The student loan system was set up by the Government, to help students with financial support during their studies. This government funding is used to help cover course fees, which is paid directly to your university or college as well as a maintenance loan which is used to help with living costs such as accommodation and food.
The student loan must be paid back from the first April after you graduate, however this depends on whether you meet the certain criteria. Paying back your loan depends on how much you are earning and your income. To find out more on this, refer to the section on ‘When do I start paying my student loan?’.
How do I pay towards my student loan payments?
Unlike other loans, student loans are taken directly from your salary rather than your bank account through the government tax system. This is shown on your payslip as a deduction from the Student Loan Company (SLC), alongside any other deductions or contributions that are being from your salary.
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Which student loan repayment plan am I on?
There are 4 student loan plans. Plan 1, 2, 3, and a Postgraduate loan. You can find out what plan you are exactly on by visiting the gov.uk website.
If you are still unsure then you can log into your online repayment account and download your active repayment letter. Then double check with your employer to see that you are on the correct plan. If they don’t know what plan you are on then they could possibly default you onto a certain plan, which could mean you maybe eligible for a refund if you have overpaid.
When do I start paying my student loan?
You will only need to repay your student loan when your income is over the criteria threshold amount. Be aware that on the 6th April, these thresholds change, so it is important to confirm the threshold amount as the figures might have changed since the time of writing.
The earliest you can start repaying your student is:
- The April after you leave your course
- The April, 4 years after the course started. The especially applies to people who are studying part time.
Let’s look at how much and when you will need to pay dependant on the plan criteria:
You will only need to repay your student loan in Plan 1 if your income is (before tax and deductions):
- Over £382 a week
- Over £1,657 a month
- Over £19,895 a year
You will only need to repay your student loan in Plan 2 if your income is (before tax and deductions)
- Over 524 a week
- Over £2,274 a month
- Over £27,295 a year
You will only need to repay your student loan in Plan 4 if your income is (before tax and deductions)
- Over 480 a week
- Over £2,083 a month
- Over £25,000 a year
You will only need to repay your student loan from your Masters’ or Doctoral loan if your income is (before tax and deductions)
- Over 403 a week
- Over £1,750 a month
- Over £21,000 a year
How much will my student loan repayments be?
The amount you will pay in student loans depends on your salary and income as well as the plan you are on. To keep things simple, here is how the contributions are worked out based on your income:
- If you are on plan 1, 2 and 4, your weekly or monthly contributions will be 9% of the amount you earn over the threshold.
- If you are on a Postgraduate Loan, your weekly or monthly contribution will be 6% of the amount you earn over the threshold.
When does interest gets charged on my student loan?
We often think that student loans don’t come with interest, however just like any loan they do. Interest starts being added to your loan when you get your first payment, which comes straight from your wage.
Currently you pay 1.1% on Plan 1 but this has varied over the years.
For Plan 2, you pay 4.4%. This is made up on the RPI (Retail Price Index) plus up to 3%. After this your interest rate depends on your income in your current tax year. Therefore, it is important to keep your student loan details update so that you can inform the Students Loans Company if your circumstances change.
What happens when I pay off my student loan off early?
Unlike other loan contracts, like mortgages, you do not get a penalty for paying off your loan early. This often beneficial as once you have paid off your student loan, you won’t be accruing interest on the loan amount and essentially you will be debt free.
What if I stop working, will I still need to make my student loan repayments?
If your income goes down the threshold or you stop working, then your repayments will automatically stop as you are currently not getting a salary or the right salary to cover the repayments.
What happens to my student loan debt if I leave my course early?
Just like any debt, once you meet the salary threshold you will need to pay the debt. This will work in the same as if you finished your course, as you have taken that loan out, so you are legally obliged to pay it.
Can my student loan debt be written off?
Wouldn’t we all wish we had a genie in a lamp, and wish away our debts? It might sound like fantasy, however unlike most loans, your student loan will eventually get written off. This depends on the repayment plan you are on. Let’s look at this in more detail:
Plan 1 depends on when you took out the student loan.
- If it was 2005 to 2006, or earlier, then your student loan will be written off when you are 65 years old.
- If it was 2006 to 2007, or later, then it is 25 years after the April you were first due to repay
- Plan 2 loans are written off 30 years after the April you were first due to repay.
- If it was 2006 to 2007, or earlier, then it when you’re 65, or 30 years after the April you were first due to repay – whichever comes first
- If it was 2007 to 2008, then your loan will be written off 30 years later after the April you were first due to repay
- If you’re a student from England or Wales, your Postgraduate Loan will be written off 30 years after the April you were first due to repay.
What if I fall ill and can no longer work due to a disability?
Sometimes life can take a turn for the worse. If you find yourself in that situation the SLC may be able to cancel your loan if you claim certain benefits. You will need to contact them and provide them with evidence of this.
How do I get rid of my student loan debt?
The best way to get rid of student loan debt is to pay it off as soon as you can, however unless you have a few thousands in your bank account at your disposal, often this is not the most practical solutions. Instead, tackle your student debt like any debt. Try and follow these steps below:
What should I do if I miss my student loan repayment?
If you don’t keep up with your student loan repayments, then it can put you in serious financial difficulty. With a student loan, it is a legally binding contract that states that you pay the Student Loans Company back the money owed to them. If you knowingly don’t pay your student loan, then the SLC can issue you with a court order which can force you to pay the loan back in full.
It is important if you are in this situation, mistakenly or knowingly, to contact the Student Loans Company to try to negotiate an agreement before it goes to court. If it does go to court then your Student Loans Company can take payments straight out of your wages, which has then a knock-on affect with the rest of the bills you need to pay.
If you find you are in this situation then it is important to get the right advice to help you deal with the debt. There are lots of debt solutions available, which could help you pay your debt into affordable monthly payments.
Does my student loan debt affect my credit rating?
If you take out a student loan and you make the correct repayments in a timely manner, your credit rating will not be affected as you are following the rules of your credit agreement.
However, just like any loan, if you break the rules then your credit rating will be adversely affected. For example, if you miss or fail to make your student loan repayments then this will show on your credit file for seven years.
As a student loan, is one of your first tasters into financial lending, starting off on a bad foot could lead you into some money issues. Imagine if you want to buy your first home or car, but a missed payment on your student loan a few years ago affects your chances. Therefore, it is important to tackle your finances head on. Find out ways in which you can improve your credit rating.
Sometimes financial problems can be unavoidable and if you do find yourself in that situation, then it is important to look at different debt relief solutions and speak to the people who can give you advice on your current debt problem.
