How Does Student Loan Debt Work In The UK?

Being a student can be a fantastic experience. You get the opportunity to live away from home, study a subject you’re passionate about, and make new friends. Not to mention, experience the infamous UK drinking culture! However, it can also come with a rather hefty price tag and a bit of debt.

This is primarily thanks to the high cost of university and the increasingly high cost of living.

How Do Students Accumulate Debt In The UK?

Wouldn’t it be nice if university was totally free? Unfortunately, this isn’t normally the case in the UK.

Luckily, students aren't left high and dry to pay for all this out of their own pocket.

Students can borrow money to help pay for university or college tuition fees as well as their living costs. This money is split into two types of loans: tuition fee loans and maintenance loans.

Students may also get extra cash on top of this if, for example, they’re from a low-income household.

All-in-all, in the UK, there are plenty of options for student financial aid. Whilst this is great for paying for higher education, after it's over, this debt can leave a bad taste in the mouth.

Particularly because from the moment you take out a student loan, interest will start to accumulate on this debt. Yikes!

How Do Students Repay Debt In The UK?

Once university is over, it may feel that reality comes crashing down. Finally, it’ll be time to pay the piper. You’ll need to get a job, and start to repay your student debt. Urgh, we know, but rules are rules!

Whilst this may sound scary, don’t panic. The Student Loans Company know that students may not be earning enough to do this right away. So, unlike traditional loans, student loan repayments are income-contingent. This means that they are based on a borrower’s income.

You only need to start repaying your student loan once you’re over the repayment threshold.

How Do Repayment Thresholds Work?

In the UK, student debt will start accumulating interest from the moment it’s withdrawn. Then, this debt will sit dormant until you start to earn above a set repayment threshold.

Repayment thresholds aren’t as simple as a single number, so let’s break it down!

These thresholds depend on two things: your income and which repayment plan you are on.

Your repayment plan is based on the year you withdrew the loan. Each plan comes with a different threshold that you have to be earning above before you start your repayments.

You can check to see which repayment plan you’re on on the government website. The thresholds for each plan type are as follows:

• Plan 1 - Yearly threshold of £22,015, a monthly threshold of £1,834
• Plan 2 - Yearly threshold of £27,295, a monthly threshold of £2,274
• Plan 4 - Yearly threshold of £27,660, a monthly threshold of £2,305
• Plan 5 - Yearly threshold of £25,000, a monthly threshold of £2,083
• Postgraduate Loan - Yearly threshold of £21,000, a monthly threshold of £1,750

For anyone out there who isn’t earning enough to cross the threshold, you won’t owe any money yet.

For Plans 1, 2, 4 and 5, you will repay 9% of your income every month once over the threshold. Those on a postgraduate loan will repay 6% of their income every month.

And, if this wasn't enough, there’s also interest to think about. Fun right - not!

How Much Interest Do Students Pay On Their Debt?

Unfortunately, interest is a big part of student loan debt. The interest you’re charged also depends on which plan type you’re on. This is currently:

• Plan 1 - 5.5%
• Plan 2 - 7.1%
• Plan 4 - 5.5%
• Plan 5 - For students starting university from September 2023, this will be based on the Retail Price Index.
• Postgraduate Loan - 7.1%
  

Failure to repay your debt plus interest may lead to some nasty consequences. This may include increased interest rates on your outstanding balance, late penalty payments, and even legal action.

None of this is very pleasant, so best avoid it if you can!

Conclusion

No one likes to think about debt. Once you get a job, you’ll inevitably want to spend your hard earnt cash on things you want. Alas, things aren’t always this simple.

The main thing is that you know which repayment plan you’re on. This will tell you all the details surrounding your student debt.

If you’re unsure about your repayment plan, the answer is just a couple of clicks away on the government or SLC website.