A quick guide to understanding student loan repayments

Student loan repayment

The student loan repayments only start once you graduate and start earning more than £21,000 but the interest starts accruing the moment you take out the loan.There seems to be a lot of confusion generally about student loans, and it is not surprising really. It is not a straightforward loan and there are lots of variables to consider. 

In simple terms, the loan works as follows:

  1. Interest starts accruing while you are studying at 3% above the RPI Retail Price Index (RPI) and so this percentage varies in line with inflation. The RPI currently stands at 2.5% (January 2017). This means that if you are studying now and have a loan you are accruing interest at 5.5%.
  2. Once you graduate your interest is accrued at the RPI until you start earning £21,000 or more.
  3. Once you start earning over £21,000 you have to start repaying your loan. At this point you will start to be charged more interest but what you are charged will vary depending on your salary. The more you earn the more interest you will be charged. The maximum you can be charged is 3% above the RPI.
  4. The amount you have to repay each month will be 9% of the amount you earn over £21,000. This means if you earn £21,500 a year, you will have to pay back 9% of £500 a month or £45/month.
  5. If you stop earning above £21,000 at any point - you are out of work or take a career break for example - the repayments stop until you start working again.
  6. If you have not repaid the loan after 30 years the loan is written off.

As you can see, the amount that each student has to repay on their loan and the interest charged on each loan varies,according to several factors. Some students will pay their full loan amount plus interest, while others will not need to pay back the full amount and there is no way of knowing, without a crystal ball, exactly how much you will need to pay back on the loan you take.

You can try out your own scenarios using our student loan calculator based on what loan you will be taking and how much you expect to earn, to see how much your own loan might cost you. 

We have put together a few different scenarios for you. We have made some major assumptions in order to provide a simple comparison: the RPI has been calculated at 3% ; graduates get an average 5% pay increase over 30 years.

Student 1
1. You borrow £27,000
2. Your starting salary when you graduate is £18,000
3. You will accrue £45,219 interest over the course of the loan
4. You will pay back a total of £42,271 over 30 years
5. £29,948 will be written off – you will never need to pay this back

Student 2
1. You borrow £27,000
2. Your starting salary when you graduate is £20,000
3. You will accrue £43,359 interest over the course of the loan
4. You will pay back a total of £52,295 over 30 years
5. £18, 064 will be written off – you will never need to pay this back.

Student 3
1. You borrow £27,000
2. Your starting salary when you graduate is £25,000
3. You will accrue £34,497 interest over the course of the loan
4. You will pay back a total of £61,497 over 29 years
5. You will have paid off the total loan after 29 years

Student 4
1. You borrow £27,000
2. Your starting salary when you graduate is £35,000
3. You will accrue £22,820 interest over the course of the loan
4. You will pay back a total of £49,820 over 21 years
5. You will have paid off the total loan after 21 years

You will see from these three scenarios, the students borrowed the same amount of money, but because the repayments are based on the amount you earn when you graduate, you can end up paying different sums back. 

Some people are arguing that you should not pay the tuition fees up front, even if you have the money, as you could put that money into a high interest savings account and you may find – depending on your salary – that you don’t ever have to pay off the total amount of the loan.

To a point this is true, as none of us know what is going to happen in the future. You do not know what job you will get when you graduate, if you will get a job at all, or maybe you will give up work to have a family and then you will not have to pay the full loan back.

However, you should also bear in mind that at the moment savings accounts earning more than 3% interest are hard to come by and so you will most likely end up accruing more interest on the student loan than you might earn in a high interest savings account, however this could change as the economy improves. The answer to the question really depends on what else you might do with the money if you don't pay off your student loan.

What is almost certain is that if you graduate and get a job, you will most probably end up paying back the cost of the original loan, plus interest. If you never work, you will not pay anything back, but we would like to believe that by going to university, that is not going to be the case.

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