Many students and graduates feel concerned about their hefty student debt, but read this quick explanation of how the system works, and hopefully you will stop worrying 😉
Far more relevant than the amount of money you owe, is the amount you actually repay.
A student loan is not a normal debt
Your student loan acts more as a graduate income tax: unlike commercial loans, repayments are calculated solely on how much you earn, not on how much you owe (amount borrowed + interest).
So if you don’t earn enough, you don’t repay.
You don’t start repaying your loan until you earn over a certain amount.
Once you earn more than this threshold, you pay back 9% of your annual income above this threshold, until your debt is cleared or written off. And whether you borrowed £10,000 or £100,000, your monthly repayments would be the same!
If your income drops, so do your repayments (this happens automatically).
If you haven’t cleared your loan within the repayment term (30 or 40 years depending on your loan plan), the remaining debt is wiped.
Note: The general repayment system is the same throughout the UK, but different rules apply in Wales, Scotland and Northern Ireland. For more details, or to check which loan plan you’re on, click here.
For Plan 2 Loans (applies to England & Wales for people who started uni 2012 – 2022):
You don’t repay your loan until you earn over £27,295 a year (before tax), and then you pay 9% of your annual income above £27,295. If you haven’t repaid your loan within 30 years, the remaining debt is wiped. Apart from the highest earners, most graduates will never have to pay back the full amount they borrowed.
For the new Plan 5 Loan (applies to England for higher education starters from August 2023):
The threshold for repayments is £25,000 a year (before tax). You’ll pay 9% of your annual income above £25,000, until either the outstanding amount is written off after 40 years, or the debt is cleared before this time.
Monthly loan repayments related to income
| Annual income (before tax) | Monthly income (before tax) | Monthly repayment Plan 2 | Monthly repayment Plan 5 |
| £25,000 | £2083 | £0 | £0 |
| £28,000 | £2,333 | £5 | £22 |
| £31,000 | £2,583 | £27 | £45 |
| £33,000 | £2,750 | £42 | £60 |
Source: Cintra.co.uk
You may never pay a penny back, or you may clear the total debt…but your annual repayment will never amount to more than 9% of your income, and for a maximum of 30 years (under Plan 2) or 40 years (Plan 5).
Basically, the psychological connotations of ‘being in debt’ are worse than the financial reality, with many graduates feeling uncomfortable about owing large sums of money, and believing it may influence their choices on careers, living situation and other opportunities.But if you can get your head around the fact that your student loan is not real debt, you should start feeling better about it. As Martin Lewis (Money Saving Expert) explains in this article, it is more like a graduate tax or ‘contribution’.
Think of it as an investment in your future. For many people, a degree will increase your earnings potential; and university will generally give you a great experience and many advantages besides academic ones!
Find out more:
Student Loans – The Lowdown
Need-to-know info on student loans, including when, what & how you repay, & the effects of interest rate changes
Should You Pay off Your Loan Early if You have Spare Cash?
Options, benefits & drawbacks
