It is predicted that people starting university in 2011 will leave with debts averaging £26,000. That is clearly a substantial amount of money; however, it pales in significance when compared to the debts of a student entering university after September 2012, which could amount to as much as £53,000. It is essential that any student borrowing money understands that money must be paid back and learns how student loan repayments work. Learning about repayments will help when managing finances in the future.
Interest rate calculations
For any student that started their UK university course in, or before, 2011, the interest rate on a student loan is calculated by in one of two ways: by adding 1% to the existing Bank of England base rate, or by using the rate of inflation. The lowest figure for the year is used.
In 2011, the inflation rate was around 5.3% (on average) and the Bank of England base rate was 0.5%. The Student Loans Company used the base rate + 1%, making the interest rate was 1.5%. The interest rate for courses starting on or after September 2012 will increase, adding 3% to the inflation rate.
Compound interest for student loan repayments
Compound interest basically means that you pay interest on existing interest. For example, if you finish university with debts of £26,000 and the following year (12 months of interest) your debt is £26,300, you will pay the next month’s interest on the £26,300 – not your original debt. Therefore, the amount of interest charged each month will go up, even if the interest rate doesn’t increase.
When do student loan repayments start?
Student loan repayments will begin in the April of the year after you graduate. For example, if you graduated in June 2012, your loan repayments would begin in April 2013. However, there is an income threshold in place which must be met before any repayment starts.
The threshold that applies to you will depend on when you started university. If you began your course before September 2012, you have to earn £15,000 before repayments begin. If you entered university after September 2012, the threshold is set at £21,000. In both cases, 9% of everything earned above the income threshold will be taken for loan repayment.
How are loans repaid?
How a student loan is repaid will depend on whether you are employed or self-employed. The majority of people in current employment work on the Pay as You Earn (PAYE) tax scheme, whereby tax and National Insurance contributions are automatically deducted from a wage. People on this scheme will have student loan payments automatically deducted once they are earning more than the set threshold.
People who are self-employed are required to put in place their own repayment arrangements.
Student loan repayment calculator
A good way to work out how much you owe on your loan is to use a student loan calculator. These are widely available online and require only basic information such as tuition fees, maintenance loan amount and length of the course. Using such a calculator will ensure that you remain on top of your finances.