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Repaying Your Student Loan

With tuition fees increasing, student loans are rising too

In a time when university fees are rocketing, it's important to know how much your wages will be affected in the repayment of your student loan when you finish university and start earning.

This information is only applicable to students who started university on or after September 1998.

When do I have to start paying back my student loan?

You will not have to pay a single penny back to the student loans company until you earn at least £15,000 a year. At this point you will pay 9% of your gross salary to the student loans company as a repayment.

  • This does not mean that if you earn £16,000 you pay 9% of £16,000. You only pay the loan on money you earn over £15,000.
  • If you earn say £16,000 then you would pay 9% of £1,000 per year.

These payments are taken from your wage by your employer, if you are employed on a PAYE tax basis.

This £15,000 a year threshold equates to:

  • £1,250 per month
  • £288.46 per month

Please note: these are pre-tax figures

How do student loan repayments affect my tax?

Student loan repayments do not affect the amount of tax you pay.

Although the contributions are calculated on your gross salary (pre tax salary) they are actually taken out of your net salary (post tax salary).

This means the student loans company receive 9% of your gross earnings above £15,000 taken from your net earnings.

This might sound slightly complicated so in summary there are, unfortunately, no tax savings arising from student loan repayments.

What if I’m not paid on a PAYE basis?

This would usually apply to people who are self employed or working outside of the UK. In both of these cases you are still required, by law, to make student loan repayments. This is done on a self assessment basis.

How is the interest calculated on student loans?

This is the question that seems to raise many answers depending on who you ask. Some people will tell you the interest is zero, not true, others will tell you it’s very high, also not true.

The interest rate is actually calculated as the lower of the previous March’s RPI (retail price index) figure or 1% above the BOE (Bank of England) base rate.

At the time of writing, August 2011, last March’s RPI was 4.4%. The current BOE base rate is 0.5%.

  • This means the current interest rate for student loans is 1.5%.
  • Remember that this may change if the BOE base rate changes.

It's very unlikely you would find a loan cheaper than that from anywhere but your family or a very generous friend.

Previous interest rates

If you are interested to see how this interest rate has fluctuated in the past see the table below for a rough guide.

Year Interest rate
2010-2011 1.5%
2009-2010 0%
2008-2009 2.56%
2007-2008 4.8%
2006-2007 2.4%
2005-2006 3.2%
2004-2005 2.6%
2003-2004 3.1%
2002-2003 1.3%
2001-2002 2.3%
2000-2001 2.6%
1999-2000 2.1%
1998-1999 3.5%

*The rate changed on numerous occasions in 2008/09 due to changing base rates but the average was 2.56%

As you can see the highest the interest rate has ever been is 4.8% but the average is much lower.

Should I pay back my student loan in full?

If you’re reading this website then the chances are that you’ve got enough savings to pay off your student loan but you’re not swimming in cash.

Consider the following:

  • Your outstanding student loan balance does not affect your credit rating or your ability to find a mortgage, loan or credit card. If you don’t believe this then visit a credit check website and see for yourself. (link to experian here?)
  • The interest on the loan will never be higher than the RPI so in real terms the loan is costing you very little indeed. With the current interest rate a £10,000 loan will cost you £150 a year
  • If you’re paying off a loan that is in the thousands are you sure that the money being used to pay it off could not be better spent elsewhere.
  • Are you sure you won’t need the money in the future? You will never get such a good loan again, not only for the fact the interest rate is so low but the fact that the loan depends on your earnings. Banks aren’t so considerate.

In summary, unless you have a lot of money it’s unlikely that paying off your student loan is a good way to spend your savings.

Are student loans ever wiped off?

There are also a lot of rumours surrounding this area. One rumour that can quickly be dispelled is that student loans are not wiped off if you go into teaching.

So here is the truth about when your student loan is wiped off (this is assuming you don’t clear your loan with repayments):

  • If you started higher education from 1998-2005 your outstanding loan will be wiped when you reach 65
  • If you started higher education from 2006 your outstanding loan will be wiped 25 years after the first April of graduation.
  • If you are a Scottish resident and you started high education after 2007 your outstanding loan will be wiped 35 years after the first April of graduation.

If you are declared unfit to work on a permanent basis or in the event of death your outstanding loan will automatically be wiped off. Your outstanding loan will never be passed to a next of kin.