Repaying Student Loans

Student debt can seem very scary, with many taking out thousands of pounds in loans before even getting a job. However, everything is not as it seems, with many ex students not even repaying student loans. This guide will go through various aspects of student debt as of now, including how much you could have to pay, when to pay it and how much it will cost you.

How much will you repay

It is very important to remember that the amount you have to repay is all based on how much you earn. So, in the short term how much you borrow normally won’t have a massive impact on how much you repay.

So, once you’ve finished your course and started earning, your repayments could start. However, it is completely dependent on how much you earn. There are thresholds you have to pass before you start repaying any of your student debt. Currently for undergraduates, the earning threshold you have to pass is £27,295. This means that if you earn under this amount per year you won’t owe any student debt payments. However, even if you earn over this amount, you only make repayments that are 9% of any earnings over the threshold. 

For example, if you earn £30,000 a year before tax, that is £2,705 over the threshold. So, your repayments will be 9% of this amount. Your total annual student debt payments will be £243.45. 

If your circumstances change, for example if your income decreases below the threshold, your payments will stop. If your student debt repayments are declared on your tax return, your drop of income will be noted, and so payments will be stopped. Similarly, if your income increases, then your repayments will increase.

You will have to keep paying your student for 30 years. After these 30 years, your student debt is wiped, whether it has been fully repaid or not.

Changes

There are massive changes coming to the student loan system in 2023. There are a few different aspects of the loan that will be impacted.

Firstly, a cap will be introduced on tuition fees. They will be kept at £9,250 until September 2025.

Secondly, graduates will have to start repaying their debt when they earn over £25,000. This is a decrease of £2,295. 

Thirdly, graduates will have to pay this debt for 40 years, instead of 30 years. After 40 years, the debt will be wiped off.

What do the changes mean

Currently, only a quarter of graduates actually end up completely repaying their student loans. These changes have made it so many more graduates will end up repaying their debts. However, because of the 40 year term, it could cost graduates a huge amount of money. The results of all these changes ultimately mean that those who are on a lower starting wage over £25,000 could suffer enormously. 

So, if we assume a student starting in 2022 borrows £8,861 a year for three years, they will owe £26,580. The students who are in the lowest decile (10%) of lifetime earnings would repay £4,600 on average. Then, the students in the 5th decile (the mid-range) would repay £53,500 on average. Finally, the students who are in the highest decile of lifetime earnings would repay £76,400 on average. So, with this system, the highest earning students would repay far more than those who earn less, with the 8th, 9th and 10th decile of lifetime earners all repaying over £70,000. 

With the new system, the standard fee level per year is £8,563, so the total over three years is £25,689. The lowest decile of lifetime earners would repay £8,500 on average, the 5th decile would repay £53,000 on average, while the highest earners in the 10th decile would repay £52,500 on average. These calculations suggest that the highest earners would repay less than the majority of graduates who earn less than them.

The new system will mean that the percentage of students who will completely repay their debt increases from 37% to 73%, as lower earning graduates are much more likely to repay in full.

When will you repay

If you were a full time student, you will be due to start repaying the loan the April AFTER you finish your course. So, if you graduate in 2023, you will start repaying in April of 2024. However, you have to meet the income threshold first. If you do not meet the threshold, you will not have to repay.

If you were a part time student, either you will start repaying in the April after you finish your course, or the April four years after your course started. In this case, whichever option comes first will be when you start repaying the loan. However, once again, you have to meet the income threshold if you are to start repaying.

How will you repay

The way you will repay your loan mainly depends on your employment status. So, if you are employed by a company, then once you start earning above the threshold the money will be taken out of your paycheque.

If you are self-employed, you will have to make repayments at the same time you pay your tax. This is paid through the self assessment system.

If you have moved abroad, then payments will be made directly to the Student Loans Company. The amount you have to pay may be different if you are overseas too, due to different thresholds.

Interest

Interest will begin to accrue on your loan from the first time the Student Loans Company makes a payment to you. The interest will continue to accrue until either the debt is repaid or cancelled. The interest rate varies wildly depending on a few factors, but is based on the Retail Price Index (RPI). For those earning under the repayment threshold, the interest rate is just the RPI. If you are earning over £49,130, then the interest rate on your debt will be the RPI + 3%. Between the threshold and £49,130, the interest is tiered from the RPI, up to the RPI + 3% in line with your earnings.

So, when it comes down to it, student loans are still a good service that allow a huge number of people to go to university. While the debts involved can seem very scary, it’s worth remembering that you only make payments if you earn over the threshold. Also, the payments you have to make are not massive, being only 9% of your income over that threshold. 

However, the changes coming into effect could massively change the viability of some students going to university, as they seem to massively affect those who leave university and then earn a lower income. 

So there is a strong message here. 

Do consider going to university if you feel it will better your career and income. That higher income will go towards repaying the student debt. 

Don’t consider going to university simply for a good time or with no improved career aspirations or expectations of higher income. That might have been fine in the past when it was largely funded by the government. Now, whilst you might enjoy the university experience, it will come at a high price if you don’t earn a higher income afterwards.