Millions of post-1998 uni starters will see take home pay rise
The Student Loans Company (SLC) administers and collects repayments for student finance from over four million people. This month, a threshold change means graduates and former students will pay less to pay off their loans.
SLC explains the changes and points you need to know about repaying your student loan:
1) When you repay…and when you don’t
The annual threshold for Plan 1 (English and Welsh students who took out loans between 1998 and before 1 September 2012, plus Scottish and Northern Irish students) is increasing from £17,775 to £18,330 (pre-tax per year) this month.
For Plan 2 members (students who took out loans on or after 1 September 2012) the threshold is increasing from £21,000 to £25,000 (pre-tax per year) this month.
With both plans, if you’re not earning above the relevant threshold, you won’t have any repayments to make.
2) What you’ll pay
You repay 9% of what you earn above the relevant threshold. For example, if you’re a Plan 2 graduate earning £30,000, you’ll repay £37 per month in student loan repayments following the threshold change. Under the previous £21,000 threshold, you would have repaid £67 per month so that means an extra £30 in your pocket.
Remember, you’ll pay more when you earn more, for example if on any month you earn a bonus, and similarly you will pay less when you earn less. If you earn under the threshold in one month, no deduction will be made that month.
3) Interest rates
Interest rates are set by the government and are revised annually. You’re charged interest from the day you receive your first loan instalment until the loan is repaid in full.
For Plan 1 members, the current interest rate is 1.50% (as of 1 December 2017) while for Plan 2 graduates, the interest rate is based on the UK Retail Price Index and varies depending on your circumstances (RPI plus 3% so 6.1%).
For those who are due to start repaying their loans, the interest will depend on your income. RPI (3.1%) where income is £25,000 or less, rising on a sliding scale up to RPI plus 3% (6.1%) where income is £45,000 or more.
YourMoney’s comment: Many of you may be thinking that if you’re paying less each month, this is essentially dragging out the process in paying off the loan within the various age and time limits, so therefore you’re actually paying more interest on the unpaid amount in the long-run.
A Department for Education spokesperson, said: “The increase in the student loan repayment threshold to £25,000 for post-2012 student loans marks a key milestone and is another example of the steps the government is taking to support those in higher education.
“Repayments are linked to income, not the loan balance or interest rate. Borrowers make repayments only when they are earning over the repayment threshold and any outstanding balance is written off after 30 years at no detriment to the borrower.
“The increase in the repayment threshold means that borrowers will see their annual repayments reduce by up to £360 a year, but all borrowers have the option of making additional voluntary repayments.”
4) First time repaying?
First time repayers this year will typically be anyone who started a three-year university course in 2014 or those who dropped out of a course during the 2016/17 academic year.
The good news is that if you’re due to repay for the first time, you may not have to do anything.
Your employer will take repayments from your salary during any period where your earnings (before tax) are over the weekly or monthly threshold – for Plan 2 customers, this will now be £480 per week and £2,083 per month. But, if you’re self-employed, student loan deductions will need to be included in self-assessment tax returns.
5) Keep track of payments
SLC advises you to monitor your repayments and keep a record of how much you are repaying on your student loan. Repayment deductions from your salary will be shown on your pay slips or your P60 – keep these documents safe as SLC will only receive details of your repayments after the end of each tax year.
6) Switch to direct debit in the last two years
Currently HM Revenue & Customs (HMRC) notifies SLC once a year, after the end of the tax year, of how much you’ve paid towards your student loan through the tax system.
This means SLC will only know your outstanding balance on an annual basis, rather than monthly, so you should select its direct debit option in the last two years of repayment to avoid over-repaying your loan.
7) Keep SLC in the loop
It’s important to keep your contact details up to date, especially if you move house as it sends correspondence relating to your account and balance.
8) When loans are written off
Student loans will be written off if you don’t repay them within a certain amount of time, as long as you’re not in arrears. The timescales for the write-off varies depending on which country provided the loan and when you started higher education.
For example, if you live in England and took out a student loan on or after 1 September 2012, then it will be cancelled 30 years after you become eligible to repay.
9) Moving abroad
You’ll need to complete an Overseas Income Assessment form if you’re planning to be abroad for more than three months. You can be charged additional penalties on your student loan if you fail to meet your obligation to make repayments while overseas.
When you’re living overseas, you’ll repay 9% of your earnings over the repayment threshold for the country you live in.
As an example, the repayment threshold if you’re living in Australia is £21,995 for Plan 1 members and £30,000 for Plan 2 customers.