6 Student loans – accumulating and repaying the debt
Student loans do not have to be repaid in the same way that conventional loans from a bank have to be repaid. However, they do attract an interest charge from the date the money is advanced.
The interest charge is set in September of each year. The basis of the charge has varied over the history of student loans.
The scale of the loans involved, and the outstanding debt accumulated even during just a three-year degree course can be substantial.
As an example, a student living in London, who takes out the maximum annual loans for tuition fees and maintenance for the 2017/18 academic year, will borrow £9250 and £11,002. Over a three-year period their accumulated debt could exceed £60,000.
For new student loans, from the date the money is advanced until the April after you leave the course, interest is added at the Retail Prices Index (RPI) inflation rate plus 3%. This rate of interest is adjusted each year in accordance with March’s RPI inflation rate.
From the April after leaving the course the rate of interest you’re charged is simply the RPI rate if you earn less than £25,725 a year (as of the 2019/20 tax year).
Once your annual income rises above £25,725 the rate charged is the RPI rate plus a margin of up to another 3%, depending on your earnings level. The top interest rate of RPI plus 3% is applied to the student debt owed by those earning over £46,305 a year (as of the 2019/20 tax year). So if the RPI rate is 3.3% per annum, for example, the maximum interest charge will be 6.3% per annum for those earning over £46,305.
Of course, adding interest to the original sum of the loan causes the total accumulated debt to build up steadily.
The crucial matter, though, is not how much you have to borrow to finance your education but how much you will end up paying back.
For those going to university from September 2012 onwards you only start to repay the loans:
- from the first April after you’ve left your course (or, if you study part-time, from the April four years after your course started)
- when you have an income level above the defined threshold for repayment – currently £25,725 per annum in England and Wales. The current threshold in Scotland and Northern Ireland is £18,935 per annum. In Scotland this threshold is in the process of rising in stages to £25,000 per annum.
The rate you repay the loans is then set at a percentage of your marginal income above the defined threshold – with the current marginal rate being 9%.
So if your income does not exceed the threshold level then you will not have to make any repayments of your debt. This means that repayments of student loans are really more like a tax than conventional debt repayments for which no consideration of your income level is made.
Note that student debts are written off if they are not repaid within specified periods. For new students these currently are 30 years for England and Wales, 35 years for Scotland and 25 years for Northern Ireland.
Watch this video where Martin Lewis explains further how student loans end up being, in effect, a graduate tax with only a minority of people forecast to end up repaying the full amount of money borrowed, including the interest accumulated.
Important questions about student loans
Let’s look at a couple of questions that are often raised about student loans.
If you expect to be earning above the threshold level during your working life could there be a case for simply paying off your student loan debt as quickly as possible?
This would only apply if you are certain that you would repay your student loans (plus interest) prior to the point where the remaining debt is written off. Even then you are taking a risk as a future government could write off student debts immediately – so if you repay early you would miss out. Additionally if you are replacing your student loan debt with new borrowed money you need to check that the interest rate on the new debt is lower than on your student loan debt. For most people repaying early would not be a wise move.
Does your student loan debt affect your ability to borrow other money, such as a mortgage for property purchase?
The debt will not be taken into account when determining your credit rating. Repayments on student debts are unique in being linked to your ability to repay, and this means that student loan debt is disregarded in the computation of your credit rating. However, when you apply for other loans or a mortgage your student loan commitments will be taken into account when the lender considers if you can afford to repay the money you want to borrow.