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Six things to know about student loans in England and Wales

20th November 2018

If you are British and have attended university since 2012, you are probably very aware of the growing cost of student loans. Although a record proportion of young people started university courses in 2017, misinformation (and a general lack of information) is widespread amongst those already attending and those enrolling onto higher education.

A lot of current and past students are not sure what their loan involves but they all need student loan debt advice. For example, do you know exactly how much you will pay back and did you know that there’s interest? This week the IMC team provide student loan advice to British university students who live in England or Wales and have Plan 2 loans. We make it clear exactly what they need to know about their student debt.

How much student debt do I pay back?

If you studied in England or Wales and started your course on or after 1 September 2012, you probably have a Plan 2 loan. The total amount you borrow depends on how much your maintenance loan comes to, alongside the minimum £9,000 per year tuition fees. But back in 2017, the Institute of Fiscal Studies (IFS) estimated that the average student in England will graduate with £50,000+ of debt. £50,000 is no small price tag but this should not necessarily put you off going.

The debt that you accrue while studying is not paid off in one go, nor will any debt collectors come knocking at your Zone 3 flatshare if you do not start paying it back a week after graduation. Your debt is only paid back as a percentage once you are earning a certain amount (more on this later). And remember, currently only a quarter of graduates are predicted to ever pay off their loans. The government and Student Loans Company know this and will not be expecting everybody to pay off that eye-watering number.

What’s the repayment threshold?

As we have mentioned, your loan does not need to be paid off in one lump sum. It may be better to view the student loan as a kind of ‘graduate tax’ on your earnings after you graduate. With a Plan 2 loan, you will pay back 9% on what you earn over £25,000.

For example:

  • If you are earning £27,000 you will pay back 9% on £2,000. This amounts to £180 per year, or just £15 per month.
  • If you earn more, the payment rises in line with your income. Therefore if you earned £40,000, your payment will rise to £112 per month.
  • If you are a postgraduate student, the repayment threshold falls to £21,000. You will pay back 6% of everything you earn above this.

As the amount of debt you owe rises as time progresses as a result of interest, if you continue to earn around £25,000 for a long period of time, you are unlikely to come close to paying off the loan entirely.

Is the loan wiped off?

If there was no cut-off point, it would take decades for most people to pay off their student loans. Plan 2 student loans are wiped off after 30 years starting on 6th April the year after you graduate. If you never earn more than £25,000, you will never pay a penny back to the Student Loans Company.

Since the new loans scheme began in 2012, a popular myth has circulated stating that if you work and live abroad, you will not have to pay back your student loan. Unfortunately though, sunning yourself in Saint-Tropez for 30 years will not wipe that debt. However, the threshold and amount you pay will change due to changes in the cost of living in different countries. To work out how much you will need to pay, you will have to fill in an Overseas Income Assessment form. This only needs to be done if you are working abroad for more than three months.

Do I pay interest?

Unfortunately, interest is accrued on your student loan. In September 2018, the interest rate for students who started university in or after 2012 rose to 6.3%. Once you are earning above the repayment threshold, the interest on your loan is affected by the retail price index (RPI). At £25,000, the interest is just the RPI and increases with your earnings up to £45,000 where it peaks at RPI plus 3%.

Coming out of university with £50,000 of debt, plus over £4,000 worth of interest sounds daunting and is certainly not to be scoffed at. However as with the loan itself, you will not be paying it off until you are earning a more substantial amount of money. Unlike most interest rates on loans, the interest accrued on your student loan is not the interest you pay. No matter how much interest is generated, your repayments will never increase.

For example; if you are earning £35,000, your repayment will be £900 per year, whether your loan and debt are £20,000 or a million.

Will the money I owe affect my ability to get loans in the future?

The short answer to this is no (breathe a sigh of relief). Your student loan will not show up on your credit score, even if you do not pay a single penny and have a huge amount of interest, it will not impact your credit score. It is true that some mortgage lenders may ask about student loans as part of an affordability check. But if you are not overspending and earn a good income, you can sleep soundly knowing that your degree will not stop you from buying a house in the future.

What happens when I get married? Will the debt pass to my spouse?

Some debts may become the responsibility of the household once the person who has taken out the debt gets married. This is not the case for student loans. Both types of student government loan in the UK are tied to the person who initially took out the loan and are entirely their responsibility.

Even upon death, student loans are never transferred. Instead, the debt is entirely written off and will never be the responsibility of your family. The debt will also be written off if you are declared unfit to work for life.

Can I go over the repayment threshold through money not earned through work?

Whether you receive a gift, are left an inheritance or win the lottery, you will not pay back anything unless you are receiving a salary of over £25,000. If you do come into a substantial sum of money, you may be tempted to pay the loan off. However, this is rarely the most cost-effective decision. Due to the lack of repercussions for not repaying and the low monthly repayments, it would be better for most young people to invest any excess savings into one of the many ISAs and LISAs that are available.

 

For further information on investment opportunities for young people, get in touch with the helpful IMC team today.

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