Repaying your student loan
Once you graduate, start working and earning over a certain amount, your student loan repayments will begin. Continue reading this article to understand the student loan process, learn how your monthly repayments are calculated, when you have to repay by and how to go about doing so.
Repayments after you graduate
It’s a great feeling when you finally graduate and go out into the world with a new degree or qualification.
As you look forward to pursuing your career goals, finding work and moving on to the next stage in your life.
This may be the perfect time to start thinking seriously about setting and sticking to a monthly budget, to reflect your current financial situation.
Once you begin earning over a certain amount, you’ll have to take monthly student loan repayments into consideration.
These are repaid automatically through the tax system and stop once you’ve paid off your student loans in full.
Whether you are:
- An employee
- In Higher-education
- Currently overseas
You need to understand exactly what’s involved in student loan repayments and how to manage your budget properly.
Types of student loan
There are two types of student loans available: Income Contingent Loans and Mortgage Style Loans (also known as a Fixed Term Loan).
Income Contingent Loans:
- If you started studying on or after September 1998, you have an Income Contingent Loan.
- This type of loan doesn’t involve flat monthly payments but is paid back through the tax system in adjustable amounts depending on your income.
Income Contingent Loans have two types of repayment plan:
- Plan 1 - Repayments apply wherever you studied in the UK.
- Plan 2 - Only applies if you’re studying in England and Wales and started your studies on or after 1st of September, 2012.
Mortgage Style Loans:
- If you started studying before September 1998, you’ll have a Mortgage Style Loan.
- You’ll be expected to pay this off in monthly instalments by Direct Debit.
- If you have four loans or less, you’ll repay them over 60 monthly instalments. If you have five or more, you’ll repay over 84 instalments.
If your annual income is below the minimum threshold, you may be eligible to defer repayments for a year at a time.
Calculating student loan repayments
Once you start working, you’ll begin repaying your student loans in monthly instalments through the tax system.
The amount of your monthly repayments is calculated by:
- Taking the total value of the student loan (plus interest based on the rate of inflation) and dividing it by the total number of months you have remaining, to pay it off.
The Student Loans Company uses your National Insurance number to keep a track of your income.
They’ll instruct HM Revenue & Customs to notify your employer when you start working, and payments will be deducted from your taxable earnings.
Once the loan is paid off in full, HMRC notifies your employer and the repayments stop. However, if any payments slip through before your employer takes action, you will be refunded.
If you are self-employed, HMRC will calculate what you owe each year in repayments, once you file your tax return.
Just make sure that you tick the box on your tax return which states that you currently have a student loan.
When do loan repayments begin?
The earliest you will have to start repaying your student loan is the 6th of April, the year after you graduate from university or college.
Repayments only kick in once you have begun earning above a certain salary.
You may have Plan 1 and Plan 2 repayments to make from April 2016, depending on when you started your studies.
- Plan 1 – English and Welsh students, who started their course before the 1st of September, 2012. Repayments start when you begin earning over £17,495 a year (£1,457 a month or £336 a week).
- Plan 2 - English and Welsh students, who started on or after 1 September, 2012. However, repayments only start when your income is £21,000+ a year.
What you have to repay
Your student loan repayment amount is calculated as 9% of your taxable earnings (so long as your income is above the income threshold).
For example if your monthly income is £1,750 before tax, you’d be required to repay 9% of the difference between what you earn and the national threshold:
£1,750 - £1,457 = £293
9% of £293 = £26
Therefore, if you were earning £1,750 a month, before tax, your monthly student loan repayments would be £26 a month.
However, if you earn £2,000 or more in interest from shares or savings a year, separate from your income, this may have an affect on what you have to repay.
Plan 1: Example student loan payments
|Annual income (before tax)||Monthly income||Monthly repayment|
|Up to £17,495||£1,457||None|
Your repayments may vary depending on how much exactly you are paid in a month.
If your income falls below the starting threshold within a certain month, there won’t be a repayment deduction made for that month.
Plan 2: Example student loan payments
|Annual income (before tax)||Monthly income||Monthly repayment|
|Up to £21,000||£1,750||None|
Similar to plan 1, your earnings determine the amount of your loan repayments.
Repaying your student loan more quickly
You have the right to pay off your student loan more quickly by making at any time single payments of £5 or more directly to the Student Loans Company.
You can do this even if your salary does not yet reach the starting level for repayments. You also have the right to pay off your outstanding student loan in full at any time.
If you do make voluntary repayments, this will not prevent your employer from making the usual student loan deductions from your pay. But it does mean that repayments will stop sooner.
Before making extra payments, you should consider first of all if you can make better use of this money to meet your budgeting needs now.
Welsh loan cancellation
If you took out a maintenance loan from Student Finance Wales under Plan 1 in academic years 2010/11, 2011/12, 2012/13 and 2013/14 or under Plan 2 on or after academic year 2012/13, the Welsh Government may provide you with a partial cancellation of up to £1,500.
The reduction will be applied to the balance of your student loan by the Student Loans Company when you start repayments.
When may your student loan be written off?
If you have a plan 2 loan, studied in the UK and started your studies before the 1st of September 2006, any balance remaining on your repayments once you reach the age of 65, will be automatically written off.
If you started your course on or after the 1st of September 2006, any outstanding balance is usually written off after 25 years.
Meanwhile, in Scotland, the period before the loan is written off is 35 years.
For Plan 2 loan’s, any outstanding balance is usually written off after 30 years.
Your loan is written off if you become permanently disabled or die.
If a borrower can prove that they are permanently unfit for work, then the student loan will be written off.
You will need to submit two items of evidence supporting your claim:
- A letter from a Doctor or Consultant, stating that you are permanently unfit for work
- Documentary evidence of disability related benefits, dated within the last 12 months
Any Outstanding loan amount is automatically written off, at the event of death. As long as the following is provided:
- Death certificate, or
- Coroner’s interim certificate
Budget now to manage your student loan repayments
Work out your incoming and outgoings on our quick-and-easy Budget planner.
Whether you’re due to start university or preparing to graduate in the near future, the moment will come when you’ll start to make student loan repayments.
It’s never too soon to start organizing your finances and budgeting.