University funding can be expensive. Many students have to take out loans to pay for both their tuition and the cost of living away from home.
These loans start earning interest as soon as they are taken out and can take many years to pay off.
But student debt repayments shouldn’t begin until job wages reach a certain threshold. It is therefore not always obvious how and when it is best to repay the loans.
This article examines:
What is the student loan repayment threshold?
You might be wondering “when do you start paying off your student loan?” The threshold is when you win more than a certain amount.
The threshold differs depending on the type of student loan – called a “plan” – that you hold. This in turn will depend on whether you are an undergraduate or postgraduate student, where you are from and when you started studying.
Most English or Welsh who take out student loans are now on Plan 2.
Scottish and postgraduate students, as well as those who took out loans before 2012, benefit from different schemes. There is a full explanation about it here.
Those on Plan 2 do not begin paying off their debt until they reach the student loan threshold for 2021/22, which is:
- £524 per week
- £2,274 per month, or
- £27,295 per year (before taxes and other deductions)
Those of Plan 1, for people who took out their loan before 2012, begin to repay when they earn:
- £382 per week
- £1,657 per month, or
- £19,895 per year
Scottish students on Plan 4 loans start repaying their loans at:
- £480 per week
- £2,083 per month, or
- £25,000 per year
The postgraduate loan threshold is £403 per week, £1,750 per month or £21,000 per year.
The threshold changes on April 6 each year, roughly in line with inflation.
How much do you need to earn to pay off your student loan?
There are reports that the government is considering changing the amount you need to earn before you have to repay a student loan.
The suggestion is that the threshold will be reduced from £27,000 a year to £23,000, although no decision has yet been made.
How much student loan do I have to repay?
As for the amounts that must be set aside for student debt, those in Plan 2 will have to repay 9% of their income over the threshold.
So if they win £30,000, that’s £2,705 over the £27,295 threshold and they’ll repay 9% of that. That’s £243.50 a year or just over £20 a month.
On Plan 4, 9% is also the percentage formula. But the threshold is below £25,000 and the reimbursement will be higher at £450 per year.
With postgraduate loans, the repayment is 6% of earnings above the £21,000 threshold.
Read more: Best student bank accounts
Can I repay my student loan early?
Student loans start accruing interest as soon as you take them out, and rates can be quite high.
Given that the maximum amount for loans is currently £9,250 per year to cover tuition fees and £12,382 for maintenance loans, you could incur a substantial bill during the long period that these loans are usually reimbursed.
The usual formula for calculating the interest rate on student loans when you take out one is the retail price index (RPI) inflation measure plus 3%. But the rate is currently capped at 4.1% in line with commercial interest rates.
This is the current rate during your studies, but then it depends on how much you earn afterwards.
While you are paid £27,295 or less, the interest rate is aligned with the RPI only. And then if you get paid more than £27,296 it goes up in increments to RPI + 3% on earnings of £49,130 or more.
Proposed changes to the student loan repayment threshold could mean that interest on these loans accrues faster.
For this reason, some students may wonder how to repay their loans faster. This would result in less accrued interest, which means less overall debt.
However, due to the way student loans work, paying them off early may not be the best solution for all students.
- Provide 2 loans: Delisted 30 years after the month of April in which you had to start repaying them
- Plan 1 loans: Canceled after 25 years or when the individual holding them reaches 65 years of age
Pay off a student loan sooner
In many cases, student loans are never fully repaid. And if your salary never reaches the threshold at which you should start repaying, you may never repay a penny.
Student loans also have no impact on your credit report. However, you may not be able to borrow that much for a mortgage if you have regular payments to meet.
All of these factors must go into a calculation of whether it’s worth paying off student loans early if you can.
How much student loan you would repay on an income of £30,000
Under current rules, someone with an income of £30,000 would repay £243.50 a year on a Plan 2 loan.
Average student debt is £45,000 plus interest. And if they stayed on that salary, they would have repaid just £7,305 by the time the loan was canceled 30 years later.
In this situation, it would not have been worth paying off the loan early.
However, if you earn much more or borrow a lower amount as a loan, the calculation would be very different.
How much student loan you would repay on an income of £60,000
Someone with a salary of £60,000 would be £32,705 above the Plan 2 threshold of £27,295. They would repay 9% of everything they earned above the threshold each year, or around £2,945 .
If interest rates remained at 4.1% and their wages remained constant, it would force them to pay a total of more than £70,000 on a debt of £45,000 over 25 years, but pay it off completely during that period.
These calculations both assume that a person’s salary, as well as the interest rate payable on loans, remains constant throughout the 30-year period.
Of course, this is unlikely to be the case, which makes the decision even more difficult.
Read more: Main bank accounts for students
Reimbursing a Master’s student loan
If you choose to study for a postgraduate degree, you may need to take out an additional loan to fund it. You can find more information on Masters and PhD loans here.
Postgraduate loans must be repaid once your income reaches £403 per week or £1,750 per month.
And if you also have an undergraduate loan, you will repay both at once.
Student Loan Repayments Abroad
If you live and earn abroad, you will still need to repay your student loan once you reach the threshold.
However, this threshold differs depending on the country you live in and you will automatically be charged a fixed amount if you do not provide the student loans company with the information they need to charge you the correct amount.
Here you will find the list of reimbursement thresholds and amounts to be paid by country. The threshold varies according to the cost of living in each country.
Unlike if you live and work in the UK, you will need to inform the Student Loans Company of your living situation and income, so that you are on the right student loan repayment plan.
You can do this online through your student finance account, which also helps pay off the student loan.
If you don’t keep the Student Loans Company informed of your situation, you risk being sued if you are supposed to repay a loan, while the debt could be referred to a credit reporting agency.
Read more: Student loans to study abroad
Can I avoid paying off my student loan?
Although your student loan doesn’t show up on your credit report as a debt, it’s a different story if you stop repaying the loan.
Delinquencies on your debt will be recorded in your credit report. This means you may find it difficult to get a mortgage, rent a property, or even get a contract for a cell phone.
So should I take out a student loan?
Even though the suggested threshold change for student loan repayment would make them less beneficial than before, they can still be useful to many people thanks to the means-tested system for repayments on your postgraduate income.
Making sure you understand how they work should help you decide whether or not it would be best to try and pay them off early.