Graduating from uni is a scary and exciting time – all of your hard work has paid off and you’ve (hopefully!) managed to achieve the grade you wanted. But now you’ve got to enter the ‘real world’ and that means leaving your student flat, moving back home and having to get a graduate job.
It’s a great achievement when you get you first job out of uni but you might be wondering when you’ll start making student loan repayments. You’re also probably worrying about how much you’ll have to pay and whether you’ll be able to afford it in your budget – so let’s go through everything you’ll need to know.
You won’t have to repay anything until you start working and are earning over the threshold. How much you’ll need to earn will depend on the type of student loan you have and this depends on when you started uni.
Don’t worry that you’ll need to remember to set up these payments when you’re earning enough – the repayments will just come out of your salary automatically when your earnings are over the threshold, just like income tax and National Insurance. You’ll be able to monitor how much you’ve paid and make any voluntary extra payments online – your letters from the Student Loans Company will tell you how to register for this.
Mortgage Style Loan
If you started at university before September 1998, you’ll be repaying a Mortgage Style Loan, also known as a fixed term loan. As the name suggests, these loans are similar to a mortgage in that they’ll last a set number of monthly payments. If you’ve got four student loans or fewer, you’ll repay these over 60 monthly instalments and if you’ve got five or more loans, you’ll repay over 84 monthly instalments.
This means it’s likely that you’ll already have paid off most – if not all – of your student loan. However, if you’re on a low income and you can’t afford to make the repayments, you’ll be able to defer these by up to a year at a time.
Income Contingent Loan
If you started studying in England and Wales after September 1998, you’ll be repaying what’s known an Income Contingent Loan. This means you’ll only start making repayments when you earn over the threshold and you’ll pay a percentage of what you earn. For students who started uni before September 2012, you’ll be on a Plan 1 loan and your current income threshold is £17,335 a year, £1,444 a month or £333 a week. This threshold changes every year on 6 April, so unless your income also increases, it’s likely that you’ll pay back less next year.
You’ll pay back 9% of your earnings over this threshold. As an example, this means that if you earn £1,500 a month, you’ll only repay £6 every month.
However, if you started your course after September 2012, you’ll be on a Plan 2 Income Contingent Loan. Your repayment threshold is £21,000 and this has currently been frozen. You’ll still pay 9% of what you earn over this amount but as the threshold is higher, the amount you’ll be repaying will be lower.
As the threshold for Plan 2 loans won’t change, this means you could effectively be paying more towards your student loan every year if you get a pay rise in line with inflation.
Don’t worry too much about your loan repayments – your student loan could be written off after you reach a certain age. If you started studying before September 2006, any balance remaining on your loan is usually written off when you turn 65.
For those who started studying after September 2012 in England and Wales and who are on a Plan 1 Income Contingent Loan, the loan is usually written off after 25 years. For those in similar circumstances but who studied in Scotland, the loan will instead be written off after 35 years. If you’re on a Plan 2 loan, your outstanding balance should be wiped after 30 years.
Paying it back early
A common question for those repaying student loans is whether they should pay it back more quickly. For example, if you come into some money, is it a good idea to put this towards your student loan?
If you’ve only just started repaying your loan, there’s probably not much point in putting a chunk of cash towards it – you’ll still have a long way to go before you’ve repaid it. However, if you’ve paid off most of your loan already and the extra cash would help to clear your balance, you might decide it’s a good idea to pay it off. That way, it’s one less payment to budget for every month and it won’t be deducted from your income.
You don’t need to worry that having a student loan will affect your chances of getting a mortgage though – it doesn’t show up on your credit history so lenders won’t be able to see it when they run a search on you.