How Does Your Student Loan Actually Work?
The Debrief: Do you actually know how your student loan works? Off the top of your head, do you know what you signed up for when you agreed to take one out to fund your degree? Do you ever think you’ll pay back your student loan? Do you care?
Here’s a question for you if you went to university and graduated in debt with a student loan hanging over you. Answer honestly. Do you actually know how your student loan works? Off the top of your head, do you know what you signed up for when you agreed to take one out to fund your degree? Do you ever think you’ll pay back your student loan? Do you care?
If the answer to any of the above is ‘no’ then you need to read this.
A spokesperson for to the Department for Business, Innovation and Skills there are currently 4.6 million borrowers with student loans, which must be repaid to the Student Loans Company. Out of those people, 2.7 million are currently eligible to be making repayments (so have finished or left their courses and are earning above the repayment threshold for their loan).
To put this in context, that’s a lot of people. And, those people owe a lot of money. Last year (the financial year 2014-15), the total amount received by the Student Loans Company in repayments was £1.6bn, a 10 per cent increase on the previous year. However, that’s nowhere near as much as what’s still owed, the total balance outstanding at the end of the financial year 2014-14 was £64.7 billion, which was a 19 per cent increase from 2014-14.
We did a quick whip round of the office to find out what we all actually know about our loans. Nobody knew what the interest rate was on their loan. In answer to the question ‘do you know, off the top of your head, how much you owe?’, everyone said they had a rough idea but not really. Nobody knew what the minimum amount you had to be earning to be eligible for repayments was.
When I asked whether any of us here at The Debrief think we’ll actually ever pay off our loans the answer was a resounding ‘no!’ When I asked whether this bothered them one staff member responded ‘I don’t know any of the answers! Awful, I care but I have to admit it just comes out of my account and it doesn’t really affect me…’ while another said ‘no – it doesn’t feel like I’m in debt. It feels quite irrelevant to my life’.
The point here is not that we’re incredibly ignorant here at The Debrief, based on speaking to other people we’re pretty representative in terms of our ‘see no evil, hear no evil’ approach to our loans. The point is that so many have these enormous debts hanging over us that we don’t fully understand, we sleepwalked into them and, now, as a result we don’t notice when the government changes the terms and conditions of them and think about how that might affect us.
Last year, Martin Lewis of MoneySavingExpert.com hired lawyers to see whether backdated changes made to the repayment threshold, freezing it at £21,000 (despite previously saying rise in line with average earnings from 2017) by the Chancellor, George Osborne, as part of his Autumn Statement were even legal. The changes, which were slyly brought in, not in Osborne’s statement to parliament, but on p.126 of a lengthy document, could mean that we end up paying back more than we initially signed up for.
You might not be aware of them but these changes do matter because, as Amy Roberts, Senior Money Writer at MoneySavingExpert.com told us, ‘in November 2015, the Government did a U-turn, saying the threshold would now be frozen until at least April 2021. This effectively hikes the cost of student loans for most students. As a simple explanation, if you earn £22,000 with the threshold at £21,000 you pay £90 a year – if the threshold had gone up as expected, to for example £22,000, you'd repay nothing.’
Lewis was, himself, so outraged by what he perceived to be the government breaking the trust of people who have taken out student loans that he has personally written to the Prime Minister, asking him to look into it.
We asked the government’s Department for Business, Innovation and Skills, who are responsible for policy when it comes to Student Loans, about why these changes were made and why we didn’t hear about them, they said:
‘The SLC notified its customers via the repayment website, as per its legal obligations.’
‘When the £21,000 threshold was set by the previous government in 2010, graduate earnings were expected to grow more quickly than they have done. Freezing the threshold reflects the need to ensure that student funding remains sustainable in the long term.’
Basically, graduates aren’t earning as much as the government thought we would be when they hiked up the maximum amount universities could charge from £3,000 to £9,000 in 2010, so they’ve decided to make sure the threshold for repayment stays low, to maximise the number of people who are repaying their loans.
So, in light of the fact that changes have recently been made to the way student loans work and that very few of us really seem to know what we’re in for when it comes to our student debt, we thought we’d ask the Student Loans Company and the guys over at MoneySavingExpert.com to clear it up for us and tell us how our student loans actually work...
What is the interest rate on my loan? How is that decided?
The Student Loans Company says:
‘Interest is charged from the day you receive your first student loan installment until your loan balance is repaid in full. The rate of interest charged depends on where in the UK you are from or when you first took out your loan. English and Welsh students whose courses started from 1 September 2012 are charged variable rate interest depending on their circumstances:
- While you're studying and until the April after you finish your course you pay RPI plus 3% (3.9% for 2015/16)
- If you were on a short course or finished your course early and should have come into repayment before April 2016 then you'll pay RPI plus 3% (3.9% for 2015/16) until the April after you leave your course, then RPI (0.9%) only until April 2016
- If you come into repayment from April 2016 then you'll pay RPI (0.9%) if you earn £21,000 or less, rising on a sliding scale up to RPI+3% (3.9%) where income is £41,000 or more.FYI: RPI stands for Retail Price Index, it’s a way of measuring inflation based on al of the things we spend money on and how those prices change over time. Basically this means that the interest on your student loan is linked to the cost of living more broadly and how that rises with inflation.
When do I/did I start paying my loan back?
The Student Loans Company says:‘You will start repaying the April after you’ve completed or left your course and are earning over the relevant repayment threshold for your loan. Students from England or Wales whose courses started from 1 September 2012 repay once they are earning over £21,000. Students from Scotland, Northern Ireland or those who studied pre-2012 from England and Wales will repay when they earn over £17, 335.’
And what if something happens I stop working?
Amy Roberts, Senior Money Writer at MoneySavingExpert.com, adds:
‘Even if you've started repaying the loan, but then lose your job or take a pay cut, your repayments drop accordingly.’
What actually happens if I move abroad?
The Student Loans Company says:
‘If you will be overseas for more than three months, you need to complete an Overseas Income Assessment Form detailing your circumstances and prospective income. You will also be required to provide evidence of your income or your means of financial support. The Student Loans Company (SLC) will then send you a repayment schedule showing how much you need to pay each month. Your monthly payments will be based upon the earnings threshold for your destination country and how much you earn. You can find a list of repayment thresholds for different countries at www.studentloanrepayment.co.uk It's your responsibility to inform SLC of any changes in your circumstances or your contact details as set out in the terms and conditions of the loan.’
So this is not a way to get out of having to repay?
‘Putting aside the moral obligation to pay back the money you borrowed, there is an enforcement issue. Certainly if you temporarily leave the UK and come back having missed some payments, expect to be pursued. If you move abroad permanently, never to return, there may be no attempt to pursue you in a foreign court. But there are no guarantees of that.’
I currently owe more than I borrowed because of interest. Will I ever pay my entire student loan back?
The Student Loans Company says:
‘The amount you repay is based on your income, not what you borrowed so this will depend on your loan balance and earnings level.’
‘Quite possibly not. If you want to check out how the numbers stack up for you try using the MoneySavingExpert.com student finance calculator. It shows that only those toward the higher end of the income scale will ever repay all of what they borrowed, plus the interest.’
What happens if I never manage to pay my student loan back?
The Student Loans Company says:
‘Repayment deductions are only taken when you're earning over the relevant repayment threshold, so, if you earn under this no repayments will be taken. Loans are written off after a number of years or under certain conditions; write offs are dependent on where you normally lived when you entered university and when you first took out your loan. More information is available at www.studentloanrepayment.co.uk’
‘If you don’t end up clearing the student loan it doesn’t matter. You stop owing either when you’ve cleared the debt, or when 30 years (from the April after graduation) have passed, whichever comes first. If you never get a job earning over the threshold, it means you won't have repaid a penny. It's one reason some of those near retirement find doing a degree very appealing, as unless they've a huge pension, they know they'll never have to repay their loan.’
We hope this was helpful. Please let us know if you have any questions or if there's anything you'd like us to find out for you.
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