This is a long time away, but it’s worth understanding now. Once you’ve graduated (or even if you didn’t complete your course) you may worry that you’ve got an enormous debt hanging over you. But don’t panic! You don’t have to repay a penny until you get a job and are earning more than £21,000 a year (this threshold could change). Once you’re past that point you’ll pay back 9% of everything you earn above £21,000. So if you earn £22,000, as it is one grand over the threshold, you’ll pay £90 of it a year.
What you’ll pay back
SALARY MONTHLY REPAYMENT YEARLY REPAYMENT
£20,000 £0 £0
£25,000 £30 £360
£30,000 £67 £810
£35,000 £105 £1,260
It’s worth thinking about this for a second. It means the amount you repay each month ONLY depends on what you earn, not on how much you borrowed in the first place (though borrow more and it may mean you repay more in total and over a longer time). So whether you’re on a £6,000 or £9,000 course, the amount to repay is the SAME. Actually you won’t even see this cash. Unlike normal borrowing, where you have to hand over the cash, with student loans, if you’ve got a job your employer takes the amount you owe from your salary each month (it’s called a ‘payroll deduction’) in the same way they do with any tax you need to pay (see the Q&A section at the end for what happens if you’re self-employed).
So you might not even notice the money has gone, since you’ll never actually have it in the first place – you’ll just take home less each month than someone who doesn’t have to make loan repayments. This is a very important point, because it means the rather scary debt collectors who normally enforce loan repayments won’t come knocking at your door for student loans.
You will be charged interest though
You will pay interest on your student loan as soon as you take it out, at the rate of inflation plus an extra 3% a year. How much interest you pay after studying depends on how much you earn. Afterwards, interest starts at the inflation rate (when you earn less than £21,000) and goes up to inflation plus 3% (when you earn more than £41,000). Interest is added to what you owe: it’s not an upfront fee and it won’t affect how much you pay each month. The interest cost will only affect you if you’ll repay all you owe before the debt wipes after 30 years, otherwise you’ll never repay it. Yet if you do earn enough to repay fully it’s likely to mean you repay more overall, and you’ll be paying for longer.
What is inflation?
Inflation is a measure of the rate at which prices change over time. Usually, though not always, they are increasing. So if inflation is 4%, then a basket of shopping costing £100 this year will cost £104 next year.
Therefore, if the interest on a loan is set at the rate of inflation it’s like saying you were lent a ‘basket of shopping’s worth’ of money this year, but when it comes to repaying you’d only have to give the cash that’d buy that same basket back. This means your actual spending power hasn’t been diminished by taking out the loan so it hasn’t cost you anything
What is interest?
Interest is the price you pay for borrowing money. It’s based on how much you owe and how long you have the loan for. So if you borrowed £1,000 with 10% annual interest you’d owe £1,100 at the end of the year if you didn’t pay anything back.
What happens if I don’t get a job, lose my job or take a career break?
If your income ever falls below £21,000 a year, or if you don’t get a job, lose your job or decide to take a career break, your repayments will simply stop.