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Do normal debt rules apply for student loans?

Student loans are a big concern for students and their families, but there are many misconceptions about this type of debt. When it comes to borrowing money, the normal approach is to self-fund where possible, and if you really must take out a loan, to pay it off in full as soon as you can.

However, when it comes to student loan repayments, the normal debt rules don’t apply. The loan is the better choice rather than self-funding tuition fees, and it’s not worth trying to pay off a student loan early. Let’s look into the way student loans operate and how you should manage them.

How do you repay student loans?

While you won’t need to pay back grants and bursaries, you’ll need to pay back most types of student finance – including tuition fee loans and maintenance loans for help with living costs.

When you start to owe repayments and how much you’ll have to repay depends on your repayment plan, when you finish your course, and how much you’re earning. Typically, repayments are due from the April following the end of a full-time course, while they’re due from the April four years after starting a part-time course. You’ll still need to pay back your loan if you don’t finish the course.

The Student Loans Company will start adding interest to your loan from your first payment, but you won’t have to pay anything back until your earnings are above the annual threshold for your plan.

The student loan repayment plans in England and Wales work like this:

  • Plan 1 – repayments due when earning £19,895 a year (9%)
  • Plan 2 – repayments due when earning £27,295 a year (9%)
  • Postgraduate (Plan 3) – repayments due when earning £21,000 a year (6%)
  • Plan 4 – repayments due when earning £25,000 a year (9%)

If you’re earning above the threshold for your repayment plan, then you’ll owe 9% of your earnings above this amount. For postgraduate loans, you’ll owe 6%. If you have both an undergraduate loan and
a postgraduate loan, you’ll be repaying a total of 15% of your earnings at the relevant rates.

Your student loan repayments are automatically deducted from your wages along with your National Insurance Contributions
if you’re an employee. However, if you’re self-employed, you must repay the percentage along with Income Tax after submitting a self-assessment tax return.

You can check your balance, update your details, and make payments in your online account.

Should you repay student loans early?

Being thousands of pounds in debt with mounting interest is a terrifying thought. This is why many people think of student loans the way they would any other debt, believing that paying it all off quickly is the best thing to do. The truth is that paying upfront or repaying early is a bad decision.

The way student loans work is different to other types of debt, because they’re written off after 30 years. Regardless of how much you’ve repaid, or even if you’ve never paid back a penny – your student loan will be wiped away 30 years from the April when repayments first became due.

This means that if you never earn above the repayment threshold for your plan in those 30 years, you’ll effectively get your degree for free. Many people who do earn over the threshold and gradually pay back 9% a month still won’t clear the full debt in 30 years, so they’ll get a big discount.

There’s no use worrying about debt figures in the tens of thousands when, realistically, you won’t have to pay back anywhere near that amount. If you have concerns about the government changing the rules in the next 30 years, you can be relatively confident that any changes won’t be retroactive.

If you’re a parent thinking about paying your child’s student fees upfront, it’s not worth it. Never take out another loan to cover your child’s student debt, either. You’ll be much better off saving your money and using it to help your child with a mortgage deposit or other investment later on.

Will student loan repayments affect my credit?

You don’t have to worry about student loan debt collectors or how it will look on your credit report. Most people make automatic repayments through their employer’s payroll system, so nobody is chasing up missed payments. At worst, HMRC might investigate self-employment tax returns.

Student loans taken out after 1998 don’t appear on credit files, either, so the large ‘debt’ won’t put lenders off. Mortgage providers are more likely to ask about student loans, but they won’t affect whether you get the mortgage or not – just the minimum mortgage repayments you can make.

Be sure to keep your student loans account updated with your employment circumstances, so you don’t end up paying more or less than you owe, and you should be fine. In the case of student loan arrears, you can contact the Student Loans Company for help with your repayment arrangements.

As MoneySavingExpert
says, it’s less of a debt and more like a tax, so you should think of student loan repayments as ‘graduate contributions’ instead. If you need financial advice to help manage your income and payments, contact GBAC – our accounting experts will be happy to assist you.