Student loan repayments

This article explores the Student Loans scheme, the repayment system and its impact on income taxation calculations.

Repaying your student loan 

Once you finish your higher education and graduate and start earning over a certain amount, your student loan repayments will begin. Below shows how your monthly repayments are calculated and ultimately made.

Thresholds

If you began your course after 1 September 2012 in England or Wales, you’ll have a Plan 2 loan. You’ll begin paying off your student loan when you earn over £25,000.

If your course started before 1 September 2012, or you have a loan from the student finance agencies in Northern Ireland or Scotland, you’ll have a Plan 1 loan that you’ll pay back when you earn over £18,330.

Repayments

Repayments are made automatically through the tax system and stop once you’ve paid off your student loan in full.

You’ll repay your loan whether you’re:

  • An employee
  • Self-employed
  • Overseas

It’s important to understand exactly what’s involved in student loan repayments so you can manage your monthly budget properly.

Using a self-assessment software provider can automatically take into consideration your student loans 

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 relative to your income.

Income Contingent Loans have two types of repayment plan:

  • Student loan Plan 1 - These apply wherever you studied in the UK, unless you have a Plan 2 loan.
  • Student loan Plan 2 - You’ll have a Plan 2 loan if you’re studying in England or Wales and started your studies on or after 1 September 2012.

Mortgage Style Loans:

  • If you started studying before September 1998, you’ll have a Mortgage Style Loan.

When do the repayments start?

The earliest you’ll have to start repaying your student loan is 6 April, the year after you graduate from university or college.

Repayments only start once you’ve started earning above a certain salary. This depends on which loan you have.

  • Plan 1 loans will start being repaid once you earn over £18,330 a year.
  • Plan 2 loan repayments start once you earn over £25,000 a year

Please be aware that you could have both Plan 1 and Plan 2 repayments to make, depending on when you started your studies.

Tracking your earnings

The Student Loans Company uses your National Insurance (NI) number to keep track of your income.

In turn they will instruct HM Revenue & Customs (HMRC) to notify your employer when you start working, and payments will be deducted from your taxable earnings.

If your income falls below the starting threshold within a certain month, there won’t be a repayment deduction made for that month.

Once the loan is paid off in full, HMRC notifies your employer and the repayments stop.

Note: If any payments are taken before your employer takes action, you will be refunded.

It’s important to keep track of monthly deductions and contact the Student Loans Company if you have any overpayments.

Self employed & repaying a student loan

If you’re self-employed, HMRC will calculate what you owe each year in repayments but only once you have filed your tax return.

You need to ensure that you tick the box on your tax return, which states that you currently have a student loan.

If you’ll be overseas for three months or more and your repayments have already started, you need to submit an overseas income assessment form, which will work out how much you need to repay while abroad.

Calculating repayments

The amount you pay back is 9% of the income you earn over the repayment thresholds:

  • £18,330 for Plan 1
  • £25,000 for Plan 2

Interest is added to your loan from the date of your first loan payment.

Plan 1

For example, earning £28,000 a year would mean you are being paid £9,670 over the threshold. 9% of £9,670 is £870.30 a year, or £72.53 per month.

Interest on Plan 1 student loans

Interest rates change every year, and for 2018-19 is 1.5%.

Plan 2

Under Plan 2, earning £28,000 a year means you have £3,000 over the threshold. 9% of £3,000 is £270 a year, or £22.50 each month.

Interest on Plan 2 student loans

When you’re studying, the interest on your loan is the UK Retail Price Index (RPI) plus 3%. After you graduate, the rate depends on how much you earn.

Can you pay your loan off more quickly?

Yes, you can pay off your student loan more quickly by making single payments of £5 or more directly to the Student Loans Company whenever you want to.

This can be done even if your salary doesn’t 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.

As always if you choose to make extra payment you should consider your own budget and make sure it’s the right choice for you.

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

2013/14 or under Plan 2 on or after academic year 2012/13, the Welsh Government might provide you with a partial cancellation of up to £1,500.

The Student Loans Company will apply the reduction to the balance of your student loan when you start repayments.

Writing off student loans

Depending on the loan you have and where you studied will depend when loans are cancelled.

Plan 2 loans, which you’ll have if you studied in England or Wales and started your course on or after 1 September 2012, are normally written off 30 years after you started repaying it.

The expiry of Plan 1 loans and Mortgage Style Loans varies a lot more.

Your loan is written off if you become permanently disabled or die.

If you can prove that you’re permanently unfit for work, then the Student Loan Company will also write off your student loan.