Lana Oconnell
Student loans in the UK can be a daunting prospect, but understanding the repayment process can help alleviate some of the stress associated with loan debt. The UK has a system in place to ensure that repaying student loans is manageable for graduates, with payments automatically deducted from earnings above a certain threshold. This threshold varies depending on the repayment plan, and loans are usually cancelled after a set number of years or when the borrower reaches a certain age. While student loans constantly accrue interest, they do not affect credit scores, and there are no consequences for non-payment due to low income.
| Characteristics | Values |
|---|---|
| Loan cancellation | Depends on when you took out the loan; if before 1 September 2006, it will be cancelled when you turn 65; if on or after 1 September 2006, they’ll be cancelled 25 years after they first became due. |
| Repayment threshold | If you don't earn above £27,295 or £21,195, depending on your repayment plan, you don't need to pay it back. |
| Repayment structure | Fixed repayment structure with no consequences for not paying when unable to pay. |
| Interest | Student loans are constantly accruing interest. |
| Credit score | Student loans do not affect your credit score. |
| Repayment plans | The Student Loans Company (SLC) can set up a repayment plan if you cannot repay the full amount. |
| Overseas repayment | You must inform the SLC if you are leaving the UK for more than 3 months; you'll be expected to keep repaying your loan unless you can provide proof that your overseas income is below the threshold. |
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What You'll Learn
Student loan repayment plans
Repaying student loans in the UK is simple, as HMRC collects student loan payments through a pay-as-you-earn (PAYE) system. If you earn above a certain threshold, your student loan repayments will be automatically deducted from your paycheck, similar to National Insurance Contributions or any other tax. The threshold depends on your repayment plan. For instance, if you are on repayment plan 2 and have an annual income of £29,000, 9% of your income above £27,295 will be deducted from your wages.
If you do not earn above the threshold, you are not required to pay back your loan. Your loan will be cancelled after a certain period, depending on your repayment plan. For example, for loans taken out before 1 September 2006, they will be cancelled when you turn 65. Loans taken out on or after 1 September 2006 will be cancelled 25 years after they first became due. For plan 2, loans will be cancelled 30 years after they first became due.
If you are leaving the UK for more than three months, you must inform the Student Loans Company (SLC). You will be expected to keep repaying your loan unless you can provide proof that your overseas income is below the threshold. If you do not inform SLC, you may accrue debt on your account.
It is important to note that student loans do not affect your credit score. However, mortgage lenders may consider your student loans before offering you a mortgage. Additionally, if you suspend or leave your course early, you must stop your student finance and may be required to repay any overpayments.
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Student loan cancellation
It is important to note that loan cancellation may not apply if the borrower is in breach of any repayment obligations. Borrowers must continue to make repayments based on their income until the loan is cancelled or fully repaid. Failure to do so can result in legal action by the Student Loans Company (SLC), which may involve a court order for a single payment of the total debt, including interest and penalties.
While student loans can be a significant financial burden, it is important to understand that non-payment without valid reasons can lead to legal consequences. Additionally, interest is charged on the loan from the day it is taken out, and future interest rate rises apply to all student loans, not just new applications. Therefore, it is advisable to stay informed about the terms and conditions of the loan and to make repayments as required.
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Student loan debt
If you do not earn above the threshold, you do not need to worry about paying back your loan, as you are not required to. Your loan will be cancelled after a certain period, depending on your repayment plan. For example, under repayment plan 1, if you took out your loan before 1 September 2006, it will be cancelled when you turn 65. If you took out your loan on or after 1 September 2006, it will be cancelled 25 years after it first became due. Under repayment plan 2, your loan will be cancelled 30 years after it first became due.
Student loans constantly accrue interest, and this can be scary to consider. However, aside from those who become exceptionally high earners, very few people will repay their entire student loan before it is cancelled. Making additional payments towards your student loan is ultimately not the most prudent way to use your money. This is because student loans do not affect your credit score, and there are no consequences for not paying when you are unable to. Mortgage lenders may, however, take your student loans into consideration before extending you a mortgage.
If you are leaving the UK for more than 3 months, you must inform the Student Loans Company (SLC). You will be expected to keep repaying your loan unless you can provide proof that your overseas income is below the threshold. If you do not inform SLC, you may accrue debt ('accrue arrears') on your account, which you will need to pay back on top of your regular repayments.
If you suspend or leave your course early, you must stop your student finance. If you do not return to your studies, the SLC will write and tell you how much you must repay. If you cannot repay the full amount, they can set up a repayment plan for you.
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Student loan overpayments
If you have overpaid your student loan, you can contact the Student Loans Company (SLC) to request a refund. You will need to provide your customer reference number (CRN) and keep records such as payslips and your P60 to support your claim.
To avoid overpaying, you can change your payments to Direct Debit in the final year of your repayments. This is now an option for the last two years of your loan. The SLC will also issue automatic refunds and actively contact those who might have overpaid.
It is important to note that you must repay any overpayments separately from your regular loan repayments, and there is no minimum amount that you must earn before you start repaying overpayments. If you are experiencing financial hardship, you can contact Student Finance England for advice and they may be able to pause or delay your repayments.
Additionally, if you are planning to leave the UK for more than three months, you must inform the SLC by updating your employment details. Failure to do so may result in accrued arrears, which you will need to pay on top of your regular repayments upon your return.
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Student loan and credit score
In the UK, student loans do not directly affect your credit score as they do not appear on your credit report. This is because student loan repayments are deducted from your future income automatically with a fixed percentage after graduation. However, other types of loans and credit that you take out as a student will be on your credit file. For example, if you have an overdraft and use it sensibly, it can improve your score. Conversely, if you overspend beyond your arranged overdraft, this may show up on your credit report.
Student loans can still show up when lenders perform affordability checks, which may affect how much you can borrow. For instance, if you are repaying a large amount on your student loan each month, a lender may decide that you cannot afford to pay for mortgage repayments on top of this.
It is important to note that while your student loan may not impact your credit score, other financial activities will. For example, missed or late student loan payments may lower your credit score and stay on your credit report for up to seven years. Additionally, hard credit inquiries, such as those performed when you apply for a student loan, can temporarily decrease your credit score and usually remain on your credit report for up to two years.
To improve your credit score while at university, you can register to vote, as credit reference agencies will give your credit score a boost for doing so. Additionally, making regular, on-time payments on student loans will help build your credit.
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Frequently asked questions
Yes, you are expected to keep repaying your loan unless you can provide proof that your overseas income is below the threshold.
Your student loan debt won't affect your credit score, and you won't be chased for it if you can't pay it. However, if you don't inform the Student Loans Company (SLC) before leaving the UK for more than 3 months, you could accrue debt on your account.
Yes, if you do not return to your studies, the SLC will inform you of how much you must repay. If you can't repay the full amount, you can ask them to set up a repayment plan.
Very few people will repay their entire student loan before it's cancelled. Student loan debt doesn't affect your credit score, and you won't face consequences for not paying when you're unable to.
Your student loan will be cancelled either 25 or 30 years after it first became due, or when you turn 65, depending on your repayment plan and when you took out the loan.
