Student Finance: How does it work? – Part 2
Tom Braithwaite, Obp Chartered Accountants | 21st February 2020
Last week in Part 1 of my student finance article I talked about how much university costs for each region of the UK, the differences between tuition fee and maintenance loans, and how to apply for them. In part 2, I’m covering how your student debts are paid back depending on your loan plan, how to pay it back voluntarily, and when your debts are written off.
Paying it back
Paying back all your student debt after graduating can be a daunting task after amassing tens of thousands of pounds. However, the process of loan repayment in recent years is much more effective, affordable, and surprisingly inconsequential to your financial situation once you start work.
All your tuition fee debt and maintenance debt are compiled into one once you graduate, so there’s no need to worry about sorting out separate debts. The way you pay off your student debt is completely automated also, so you do not ever need to see the money, or worry about missing payments etc.
For English and Welsh students of courses started after September 2012, you do not begin to repay your entire student debt until you earn over £25,725. For Scottish and Northern Irish students, you won’t start making repayments until you earn over £18,330. Repayments are managed through the tax system, dependent upon which type of loan plan you have. If you’re self-employed, repayments are managed through the processes of your tax self-assessments. Employers directly deduct payments from your salary, so you never see the money.
Working out how much you pay after you earn so much over the threshold can be a confusing task. Simply, you will pay 9% of your taxable income over the payment threshold. So for example, using the English and Welsh repayment thresholds, you earn £27,000 per year, you pay 9% of the amount over £25,725 – realistically, not a lot. Whereas if you begin on a salary much greater, you are earning much more over the minimum payment threshold, and therefore repay larger amounts because of it. This system is designed so that you repay your student debts proportional to the amount you earn, so that it does not impact your financial situation immensely after graduating.
It is important to note, although probably obvious to most, that student debts do apply interest rates; they are set each year at the beginning of September, and at the moment it sits at 1.75%.
Can I pay it back sooner?
For those wanting to pay back their loans outside of the tax system, you are entitled to pay back £5+ as a singular payment whenever you feel like it, even if you do not reach the income threshold however this does not stop your employer from deducting the usual amount from your salary on principle.
You are entitled to repay your entire student loan, or as much as you feel you are able to, at any time. Considering this, it is important to weigh up whether this is a viable option and whether you can make better use of this money for budgeting purposes.
Getting your debt written off
Exactly when your student debt is written off depends when you started your studies, where you studied, and which loan plays you have.
For those with loan plan 2 (most students these days), which is when you began your studies after 2012, is written off after 30 years of the dated you started repaying. This is regardless of the outstanding amount that you still owe Student Finance.
Those with plan 1 loans are much more complex, and it is likely that those of you who do have loan plan 1 from before 2012 already understand how your loans are repaid, however if you need more information you can find it here.