For many of us, a student loan debt 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 fantastic at first. However, it isn’t a ‘forgotten loan, as many might often say. If you do not keep up with your loan payments when you are eligible, 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 debt help is available if you find yourself in student loan debt.
What is a student loan debt?
When most students decide to go to university, one of the first things they think about is covering 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 they 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 debt work?
The government set up the student loan system to help students with financial support during their studies. This government funding is used to help cover course fees, which are paid directly to your university or college. A maintenance loan is provided to help with living costs such as accommodation and food.
The student loan must be paid back from April after you graduate; however, this depends on whether you meet specific criteria. Paying back your loan depends on how much you earn and your income. To learn more about this, refer to the section on ‘When do I start paying my student loan?’.
How do I pay my student loan debt 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 from your salary.
Which student loan debt 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 precisely on by visiting the gov.uk website.
If you are still unsure, 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 right plan. If they don’t know what plan you are on, they could default you onto a certain plan, which could mean you may be eligible for a refund if you have overpaid.
When do I start paying my student loan debt?
You will only need to repay your student loan when your income is over the criteria threshold amount. Be aware that these thresholds change on the 6th of April, so it is crucial 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, four years after the course started. This especially applies to people who are studying part-time.
Let’s look at how much and when you will need to pay, depending on the plan criteria:
Plan 1 Student Loan
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
Plan 2 Student Loan
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
Plan 4 Student Loan
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
Postgraduate Loan Repayment Plan
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 plans 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 debt?
We often think that student loans don’t come with interest; however, they do, just like any loan. Interest on students loans 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 based 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 vital to keep your student loan details updated so that you can inform the Students Loans Company if your circumstances change.
What happens when I pay off my student loan debt early?
Unlike other loan contracts, like mortgages, you do not get a penalty for paying off your loan early. This is 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 debt repayments?
Suppose your income goes down the threshold or you stop working. In that case, 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?
Once you meet the salary threshold, you will need to pay the debt like any 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, your student loan will eventually get written off, unlike most loans. This depends on the repayment plan you are on. Let’s look at this in more detail:
If you are on the Student Loan Plan 1
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
If you are on the Student Loan Plan 2
- Plan 2 loans are written off 30 years after the April you were first expected to repay.
If you are on Student Loan Plan 4
- 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 are on a postgraduate student loan plan
- 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 possible; however, unless you have a few thousand in your bank account at your disposal, this is often not the most practical solution. Instead, tackle your student debt like any debt. Try and follow these steps below:
- Are you paying the correct amount?
First, it is vital to check that you are paying the correct amount via PAYE. If you feel you are overpaying, contact your payroll department and Student Loans Company to review this. This could help the pinch in your wages each month.
- Budget your student loan amount into your expenditure
Like we budget for other things, who says we can’t do this with student loans. Often having a chunk of your student loan taken out of your wages each month can cause an unexpected sting in your finances. Work out approximately what you owe and what you think you will earn. If you know this, it gives you more time to save up if that amount is unexpectedly taken out of your wages.
Find out ways in which you can make the most out of your monthly food budget.
- Prepare for a fluctuation in contributions
Remember that your yearly wages might be below what is mentioned in the threshold for the student loan debt, but you may often increase your monthly and weekly paychecks, which may mean you have to pay the occasional loan on your wage slip. So be aware of this.
What should I do if I miss my student loan repayment?
A student loan is a legally binding contract that states that you pay the Student Loans Company back the money owed to them. If you don’t keep up with your student loan repayments, it can put you in severe financial difficulty. If you knowingly don’t pay your student loan, the SLC can issue you with a court order that can force you to pay the loan back in full.
It is essential 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 goes to court, then your Student Loans Company can take payments straight out of your wages, which has a knock-on effect with the rest of the bills you need to pay.
If you find you are in this situation, it is essential to get the right advice to help you deal with the debt. There are many debt solutions available, such as IVAs and Debt Consolidation Loans, 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 make the correct repayments promptly, your credit rating will not be affected as you are following the rules of your credit agreement.
However, just like any loan, your credit rating will be adversely affected if you break the rules. 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 on the wrong foot could lead to 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 essential to tackle your finances head-on. Find out ways in which you can improve your credit rating.
Where can I get help if I have student loan debt?
Sometimes financial problems can be unavoidable. If you do find yourself in that situation, it is essential to look at different debt relief solutions and speak to the people who can give you advice on your current debt problem.