Written July 2020, all information correct at time of writing
Debt is a heavy word. It’s a distinctly adult word, laden with worry and long-term commitment. To enter into debt is to make a promise to pay it back for a good chunk of time depending on the size of the loan. We enter into debt fairly often, from spending using credit cards to occasionally dipping into your overdraft – debt is something we’re more familiar with than we’d think.
However, for someone like me, who finds it difficult to commit to one particular drink order and who likes to pay back what I’ve borrowed as soon as humanly possible, the idea of making a long term commitment to paying back a large sum of debt should seem ridiculous. And yet, like almost everyone reading this right now, I unquestioningly signed myself up for 30 years of debt repayment.
Student loans for higher education are a key way to help people access a university education, and seem part and parcel of uni life. Paying tuition, rent and living costs quickly add up, so without this loan, a large proportion of us simply could not be here. In many ways, UK student loans are very generous – you only pay above an income threshold, almost everyone gets approved, and your debt gets cancelled after 30 years.
However, it’s still important to understand what and how you’ve borrowed so that you can make informed repayment decisions. Using calculators like this one or this one, you can estimate how much of your loan you will repay before it gets cancelled depending on your expected (or dream?) starting salary. Having this kind of information helps you decide things like whether it would be cheaper to pay back the loan quicker in a larger than required lump sums or just pay the minimums until it gets cancelled.
A quick reminder about UK Student Loans
- In England and Wales, while studying the interest rate charged on your loan is RPI plus 3%.
- RPI (Retail Price Index) is set every September using the rate from the beginning of the tax year – so RPI changes every year.
- For example, in September 2019, RPI was 2.4%, so total interest charged will be 5.4%.
- After you graduate, the interest rate on the loan is RPI + 0-3%, depending on your salary.
- FYI if you don’t reply to SLC whenever they ask for information or evidence, they’ll automatically charge you RPI +3% regardless of earnings – so keep on top of it!
- You start repaying your loan the April after you’ve left your course but only if you earn more than £26,575 per annum (If you have a Plan 2 Loan).
- You pay 9% of your earnings above the repayment threshold, i.e. if you earn £30,575/year you would pay 9% of £4000 (£360/year).
- Your loan gets cancelled after approximately 30 years (this number depends on which part of the UK funds your studies).
- Repayment is automatically taken from your wages, so you don’t have to remember to set money aside, but do factor the amount in when you’re calculating your budget (National Insurance contributions are also taken from your income before you get paid).
- If you are self employed or move abroad, you will have to repay your loan differently.
In researching this week’s piece, I found out that Student Loan terms can be amended even after the contract has been signed. The Student Loan Agreement that you sign before your loan is finalised has a clause that states:
“When you take out a student loan, you must agree to repay your loan in line with the regulations that apply at the time the repayments are due, subject to the regulations being amended from time to time.”
This means that regulations concerning loan repayment (like the minimum salary threshold and the interest charged on your loan) could be changed and enforced at any point. Moreover, even as university is marketized and students are increasingly treated as consumers, your student loan is not covered by the Consumer Credit Act.
It’s important to keep aware of any changes that the government might choose to enforce, and to exercise your political will to campaign and contest proposed changes. This does work; in 2016, the government backtracked on promises to increase the income threshold annually to instead announce that the threshold would be frozen for five years. After much campaigning from independent groups and individuals, the threshold was raised and promised to rise each year in line in average growth in earnings. This is a key issue; why is it that financial regulators do not allow commercial lenders to make ad hoc changes to terms, but the UK government seems to be able to do just that with student loans?
I know that talking about money, especially now, can be hard and uncomfortable. Hopefully, being aware and clear-eyed about your student loan will help you manage this debt, especially after completing your studies.