A student loan is designed to allow people to access university who would otherwise be financially excluded. University tuition fees are currently £9,250 per year, and additionally, students must pay for their rent and general living costs. On average, tuition fees and accommodation costs can exceed £40,000 over a typical three year course, which doesn’t include food, bills, and day to day living expenses, so it’s not common for people to go to university with their savings alone.
A student loan is generally considered a “good debt” as it is a financial investment which is expected to return a greater income to the student than the salary earned by people who do not achieve a degree from university. However, while you may have sorted your tuition fees and maintenance loans for the three or four years you are studying, when it comes to repaying the student loan, it can be a little less clear.
In normal consumer credit, there is a clear repayment plan and your credit agreement will state either the total amount repayable, or the minimum payment amount on running accounts. However, there’s a large percentage of university students who have little to no idea of how the repayment system for student loans actually works.
The good news is that your student loan only becomes payable once you earn over a certain amount each month. So, if you graduate from university and you enter a low income position, you won’t have to worry about repaying your student loan on top of other first job qualms.
Currently, there are three different thresholds which determine your monthly student loan repayments, and these are varied by when you attended university and whether you are studying an undergrad or postgraduate course. The three plans include (with reference to English and Welsh students only):
Instead of paying a set figure each month, the repayment amounts are determined by your monthly salary. In Plan 1 and Plan 2, you repay 9% of the amount that you earn over the income threshold for each respective Plan. For a Postgraduate Loan, this is 6% of the amount you earn over the threshold.
If you started your undergraduate course before 1st September 2012 then you will only start repaying your student loan once you earn over £1,615 per month before tax and other deductions. As explained above, you only repay 9% of the amount you earn over £1,615 each month. So, if you earned £1,800 per month, you would only repay 9% of £185 (the difference between £1,800 and £1,615), so £16.65 will automatically be deducted from your income each month.
For students who started university on or after 1st September 2012, the income threshold is higher. Once you earn over £2,214 per month you will start to repay 9% of the amount over £2,214. For example, if you earn £3,000 per month before tax deductions, your student loan repayment would be £70.74 per month.
As with most loans, there is an interest rate on student loans, but it varies depending on how much you earn and you’ll find out your exact interest rate once you start repaying your student loan. While you are still studying at university, the interest rate is 5.4%, however this changes once you finish or leave your course.
It’s important to note that the amount that you owe does not make a difference to the amount that you repay. Your student loan repayments will always be reflective of your income. Plus, your student loan is written off after 30 years anyway, regardless of how much or how little you have already repaid, and unless you have a very large salary consistently throughout your working life, you’re unlikely to repay your entire student loan before the 30 year cap. If you earn under the threshold for the 30 years after you finish university, you will actually never repay any of your student loan borrowings.
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