Student Loans: Let’s figure it out.By Sophie
The student loans process is always presented as idiot proof, however thousands of us nationwide still struggle with the ins and outs of the system.
To make things easier for you, we have collated this easy and concise guide.
What type of loan do I have?
If you took out the loans after 1998 and before 2012, then you are most probably under the Contingent Repayment Plan 1.
This means that you must begin repayments the April after your graduation if you earn (before tax):
- £15,795 per year
- £1,316 per month
- £303 per week
How do I make re-payments?
Each time you are paid the correct amount of loan repayment will be automatically deducted from your salary by your employer.
This figure is always 9% of the amount you earn which is over the thresholds above.
Keep your pay slips as proof of the deductions made by your employer, as your loan contribution is deducted on an annual basis.
How are the re-payments calculated?
- You earn £18,000 per year. This is £2205 over the annual threshold of £15,795.
- 9% of £2205 is £198.45
- Your monthly repayment figure is approximately £16.50
What about interest?
However let us take the figure of £20,000 as the basic level of graduate debt.
The interest rate on student finance is currently set at 1.5%. This means that every month a debt of £20,000 would increase by £25.
In order to actually pay off your loan, as opposed to just covering the interest, you would have to earn over £19,500.
Should I be worried? The pluses and minuses
No! The system is actually quite fair:
- If you have a great job, then you will pay for that obviously worthwhile education.
- If you’re not a big earner then you either won’t be paying at all, or the amount you do pay will leave you with plenty of disposable income per month.
- After 25 years the debt will be cancelled!
- This isn’t a loan like normal commercial loans; interest will always be set according to the Retail Price Index, so you won’t pay more for your loan in real terms.
- The amount you repay will also vary with your financial circumstances; no one will come knocking at your door for the money!
- The amount you owe will not be taken into account when you apply for other loans, like a mortgage, however you can expect to be asked if you do have student debt.
However there are a few drawbacks:
- Unless you earn over a certain amount, which you can calculate from the exact figure of your debt, you will only ever pay off the interest.
- After 25 years the debt will be cancelled, meaning that the small amounts taken from your account were wasted in the long run.
- If something should go awry, and you fall behind on repayments, the Student Loans Company can decide to hold back on cancelling your loan after 25 years.
Should I fast track repayments?
If you would like to fast track your repayments then this is possible. Just call The Student Loans Company or visit their website.
But before you decide to invest any spare cash into paying off your student debt, consider the following:
- Pay off any other loans first: their rate of interest will be considerably higher.
-Instead of paying off this non-threatening debt, save. A high interest ISA will earn you more money than you will save by reducing the amount of your debt.
What will be the impact of further study?
Ok, so after viewing these figures, the thought of completing a programme of further study may seem like an even more expensive option.
But if you are passionate about your subject and you have a clear goal then at the current rate of interest, a debt of £20,000 would only increase by £300 during your Masters year.
Don’t stick your head in the sand about your finances guys! This is important stuff. Now that you have the low-down on how to deal with your student debt, make enquiries with The Student Loans Company to get the heads up on your own situation and start being money smart!
Please note that this information applies to the English loan system.