Money management

Student loans explained

18 May 2021 | Posted by Gaby Mendes
student loans

Before making the decision to go to university, many students want to read up on how student loans work. Student loans are made up of tuition fees (paid directly to the university) and maintenance loans (paid directly into your bank account). 

Student tuition fees trebled in 2012, meaning that students needed to borrow more in order to go to university and, as a result, many people became worried about the additional debt this would put them in. 

The below table outlines the tuition fees paid by region for courses starting in 2021.


Student’s home region

Studying in England

Studying in Scotland

Studying in Wales

Studying in Northern Ireland

England

Up to £9,250

Up to £9,250

Up to £9,000

Up to £9,250

Scotland

Up to £9,250

No fee

Up to £9,000

Up to £9,250

Wales

Up to £9,250

Up to £9,250

Up to £9,000

Up to £9,250

Northern Ireland

Up to £9,250

Up to £9,250

Up to £9,000

Up to £4,395

EU and other international


Variable


Variable


Variable


Variable

Maintenance loans are also available to help with the living costs of university and are dependent on your household income and the location of where you will be studying. For example, you’ll get a higher maintenance loan if you choose to study in London due to the higher living costs. Maintenance loans can range from £3,410-£12,010.

This may seem like a lot across a 3 or 4 year course, but do not worry, it’s not as bad as you think because you’ll only have to start paying them back once you earn over a certain threshold.

How repayments work

Many of us go to university and get student loans but not all of us understand how repayments work. It’s important to note that what you pay in student loan repayment plans depends on what you earn after university. Those that earn a lot after university will repay more than those who earn less or don’t work after graduating. In simple terms, you’ll pay 9% on anything above the salary threshold. 

The salary threshold

Student loan repayments can feel overwhelmingly high but they only need to be paid back once you are getting paid over a certain salary threshold.

The earliest you’ll start making repayments is the April after you graduate. However, your student loan repayments will only begin once you are earning above £2,214 a month or £26,575 per year (this figure will increase to £27,295 in April 2021). Once you start earning above this threshold, you’ll pay 9% on any earnings.

Why it’s different to other kinds of debt

A student loan is different to many other kinds of debt for a number of reasons, including:

  • It does not affect your credit score and therefore will not impact applying for mortgages etc.
  • All of the debt is wiped after 30 years.
  • The amount you pay back will depend on what you earn.
  • You won’t get a visit from the debt collectors as your payroll will organise the payments, ensuring you pay it!

As this comes straight out of your pay packet each month, people often find it easier to think about their student loan a bit like a tax.

Interest on student loans

With almost every loan you take out there will be an interest fee for borrowing that money and that is no different for a student loan.

The amount of interest you pay on a student loan depends on what you are earning and the Retail Price Index (RPI), which is a measurement of the changes in the cost of basic goods and services otherwise known as ‘inflation’.

While studying and up until the April after you graduate, interest on your student loan is currently RPI + 3%.

After you graduate, the interest rate you’ll pay on your student loan will depend on how much you earn and can range from 2.6%-5.6%.

Many people believe that due to the high interest rates, they’ll never be able to pay off their loans, but unlike other types of debt, this isn’t something to be worried about as after 30 years the debt will be wiped.

Will it be written off after time?

Many of us are told at university that our student loans will be written off if they have not been paid back after a certain amount of time.

To break it down there are two points when you’ll stop owing money; when you’ve cleared the debt (paid it all off) or 30 years from the April after you graduated, whichever comes first. Therefore, you won’t repay a penny if you never work in a job earning over the threshold in the 30 years after graduating.

How does it get paid?

Your repayments are automatically added onto payroll which makes it easy to keep track of how much you are paying back each month. To make sure you start making your student loan repayments, you need to check the relevant box on the P45 to say you have a student loan so that it is taken out of your salary each month.

Why worrying about ‘debt’ should not be a barrier to attending university

If you’re thinking about going to university, taking out a student loan, should not be a barrier to doing so. In reality, you’ll only ever start paying this back as a high earner and many won’t pay all of this debt off in the 30 years after graduating.

Key takeaways

  • Student loan repayments are automatically calculated and paid out of your salary
  • Student loan repayments are dependent on your earnings
  • It will be wiped after 30 years
  • Worrying about debt should not be a barrier to attending university
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