Undergraduates can borrow tens of thousands of pounds to fund their studies, but when it comes to repaying student loans, the rules can be confusing.
What are you going to borrow?
“Student loans are a complex subject, and there are many myths out there, so it’s important for students to understand repayments, their obligations, and the implications for future borrowing,” says Paula Roche, general manager of consumer solutions at Equifax. UK.
This will depend on when you graduate, as well as where you are from and where you choose to study.
English universities can charge local students up to £9,250 per year. Undergraduate students in England can also take out a maintenance loan of up to £12,667 to cover their living costs. Maintenance grants were phased out in 2016.
The loans don’t have to be repaid until after you graduate, but accrue interest while you study.
What is the interest rate?
Student loans accrue interest from the day the first payment is made to your bank account or at your university, until it is repaid in full or cancelled. Interest is calculated daily and applied to the balance each month, which is called compound interest.
The rules depend on which reimbursement plan you are on: there are four different ones, but if you are an English or Welsh student, who started an undergraduate course anywhere in the UK during the last decade, you’re on plan 2, so we looked at that option.
While in school, the interest rate charged is usually based on the Retail Price Index (RPI), which is a measure of inflation that includes housing costs plus 3%, but after graduation , the rate is indexed to your income. The rate is usually set on September 1 of each year, based on the RPI of the previous March.
If you earn £27,295 or less, the interest rate applied is the rate of inflation, but if you earn more, you pay a higher rate linked to your salary. This is a sliding scale and borrowers reach the maximum rate of RPI plus 3% once they earn around £50,000.
Last September, due to soaring inflation, the interest rate on Plan 2 loans was capped at 6.3% for three months, and the government recently confirmed that it will increase to 6, 5% in December.
How much to repay
Full-time students begin repaying their loan through the tax system from April after graduation, but these automatic repayments only begin when your income exceeds your repayment plan threshold, which in this case, is £27,295 per annum.
This equates to a monthly salary of £2,274, or £524 per week, in the UK. If your income is below this threshold, repayments will stop until your income recovers.
In Plan 2, students pay 9% of what they earn over £27,295, regardless of how much debt they owe.
It is possible to make additional repayments but this is not recommended by financial experts. The government’s advice is to ‘consider your personal and financial situation and how it may change in the future’ before doing so.
Borrowers only need to make additional payments if they expect to repay the outstanding balance in full by the end of the 30 years.
At present only around a quarter of students do, although that figure is set to rise as, from next September, students in England will have to repay university loans over 40 years.
Who does not have to repay?
Graduates don’t have to repay their loan if they earn less than £27,295, and the balance will be amortized after 30 years. This means that someone who never earns more than that will never repay their loan.
A student loan can be waived for people who can no longer work due to illness or disability and claim certain benefits, including personal independence payments, disability living allowance, childcare allowance, invalidity for accident at work and an allowance for serious handicap.
It is also expunged if a student dies. Family members must notify the Student Loans Company (SLC) and provide proof, such as an original death certificate and customer reference number.
What about taxation?
Refunds are based on pre-tax income, but the money is taken after the tax has been paid. A person whose annual salary is below the repayment threshold of £27,295 should make no student loan contribution.
However, a refund can be deducted if the income exceeds the weekly or monthly limit of £524 and £2,274 respectively, for example, by working overtime or receiving a bonus.
Overpayments can be recovered at the end of the tax year by contacting SLC.
What if you move abroad?
It’s a myth that student loan repayments can be avoided by moving abroad. Those planning to move abroad for three months or more should contact the SLC, who will determine what refunds should be made and, if so, how much.
This only applies to people working abroad, not to study, volunteer or travel.
Graduates living abroad must pay the SLC directly rather than money automatically deducted from their salary, either through their online account or by international bank transfer.
Reimbursement rules are the same as in the UK, but there are different income thresholds for each country to reflect the varying cost of living. For example, in the US the threshold is £32,755 and in Singapore it is £16,380.
Anyone who does not give the SLC their income information will have to pay a fixed monthly reimbursement rather than an income-based reimbursement, which could cost more per month.
Brits who fail to repay their student loans while abroad will run into arrears.
According to the latest government statistics, 54,700 graduates were living abroad and repaying their loans – up from 8,700 people – but the number of borrowers in default jumped from 1,500 to 49,500 in April.
Does this affect mortgages?
Student loans do not appear on credit reports and do not affect credit scores. However, this could still affect how much a bank is willing to lend to those applying for a mortgage, as take home pay is taken into account.
“The first thing to know is that student loan repayments don’t directly affect your credit score,” says Roche of Equifax UK. “They won’t show up on your credit report and won’t directly affect your ability to take out a loan in the future.
“This is because they are automatically deducted from the graduates income, before the money hits your bank account, and it will only happen when you earn more than the threshold amount.
“However, student debt accumulated in other ways will show up on your credit report, for example, credit card spending, overdraft usage, and other personal loans such as for a cellphone.”