Student loans are a mystery to a lot of us.
Not many know that this is the cheapest loan you’ll ever take out, and that 83% of students don’t ever pay their loan back off!!!! Crazy.
So how does the student loan repayment program work exactly? I recommend reading first this article, and then popping over to another one titled Should I pay my Student loans? To figure out your personal situation.
What does the student loan cover
First of all, your student loan include tuition, maintenance and interest. Tuition is now at £9,250 per year, your maintenance loan depends on your personal situation and the interest is the following:
The next thing to take into account is that there are two kinds of plans: Plan 1 and Plan 2.
Plan 1: took out your student loan before the 1 September 2012
Plan 2: took out your student loan on or after 1 September 2012
If you’re not sure you can check out the Student Loan Repayment website.
Most of you reading this will be on Plan 2, so this article focuses mostly on you (yay).
How much will I repay?
So you do your 4 years in uni, take out a student loan that covers tuition, maintenance and interest. You then will have a job - how does the repayment process look like?
First of all, you start the student loan repayment program on the April of the year after you graduate. And then it’s pretty simple: your employer will take out repayments from your salary before you even receive it - through a scheme called PAYE. If you’re overseas check this.
What you need to really understand is this: what matters is how much you pay back, not how much you take out.
You’ll be paying back 9% of your income over the threshold. Here are some tables to make it clearer:
Plan 1:
Plan 2:
If you have both, you will need to pay a figure between £18,300 and £25,000. For more info check this website.
Let’s put an example of Johnny who’s on Plan 2, as most of you are too, has graduated from university and is now due to start paying back his student loans.
The first year he earns £1,500 a month. That means £18,000 a year. Since it’s under the threshold he pays ZILCH back to the student loan company.
The second year he earns £2,250 a month - a pretty sweet raise from his cool boss. That’s £27,000 a year - £2,000 above the £25,000 threshold. 9% of 2,000 is £180. He will have to pay £180 that year, or £15/month back to the SLC.
So as you can see, that really ain’t much.
It’s the same deal if you’re self-employed - you will make your repayments to the student loan repayment program in the tax year that begins after you graduate or leave your course - HMRC will send you a self assessment tax return and you’ll fill it in. The cool part is that you can add your expenses against your profit, meaning you’d pay even less in student loans (for more info check out this post)
Refunds
So there you go, it’s pretty easy to calculate how much you’ll be paying back once you start a job.
If you have an irregular job where you earn a different amount every month, you can ask for a refund if at the end of the year you’re earning less than the threshold (£25,000).
At the end of the tax year, they check how much you earn and you can submit a refund. They argue that it makes sense to not ask for a refund, since then you’ll be paying off your student loans earlier. But I disagree - you want to paying as little as possible of your student loan. Check the next section 😉
Here’s how to ask for a refund.
Should I pay them off early?
This is the biggest discussion of them all. Should I pay my student loans off as soon as possible?
My quick answer: NO
But there are two aspects to this: financial and psychological.
Financially, you saw how little you had to pay in the first place. I get into details in the post on Should I pay off my student loans - and I use an easy example:
- Damian graduates university with £52,166 in student loans. He gets a job earning him £27,000 a year. £27,000 is £2,000 above the £25,000 threshold, so he will contribute back 9% of £2,000 = £180 in the first year. If his salary doesn’t change at all (unlikely), he’ll only have paid back the equivalent of £5,400 after the 30 years are over. For a more accurate answer (taking into account salary increase), check out these calculators: University Guide, Save the Student, Money Saving Expert
- Emma also graduates with £52,166 of student loans. She gets a job in banking and earns £60,000 in her first year. After doing some calculations and research, she realises that it will take her 17 years to pay off the entire student loan, and by then the total will be £76,940. She decides that she could afford to pay them off early and does so to avoid paying the extra £24,774 of added interest.
So as you can see, it’s only worth paying your loans off early if you’re earning a large amount.
However, student loans also affect you psychologically: there are a lot of people who hate owing money to someone and feeling they need to pay them every month/year. And that’s totally understandable.
In this case, it may make more sense to pay them off early, so you are at peace of mind.
If you don’t mind too much, then it’s better not to. Remember that the loan will be written off after 30 years.
If you do want to pay them off early you can do so at the Make a Payment service with the student loan repayment program. And you can go check your balance here: Login.
So as you can see, the most important when analysing student loans is: understanding them and evaluating what’s most important for you: the psychological or financial aspect.
Think about it for a bit, and then drop your thoughts in the comments below. Is the psychological aspect very important to you?
