How do student loan repayments work and what happens when I’ve finished university?

When you go off to university you will need to pay tuition fees for your course and you will need to live. There will be accommodation costs, food costs, books and resources to buy and other living expenses. Most of you will need to take out a loan through student finance in order to pay for these things and this means student loan repayments in the future (if you earn above £21,000 pa*).

The question is - how much will you actually pay?

For those of you who aren’t interested in how student finance works - the very short answer is that you will pay 9% of anything that you earn over £21,000*. So, basically, when you get paid, you will see on your payslip deductions for national insurance (12%), deductions for Tax (20%) and deductions for student loan repayment (9%).

How much are you likely to borrow in student loans?

The average student loan debt in the UK is now over £50,000. Tuition fees are on average £9,000 per year (so £27,000 for a three-year degree course and an increase of 800% since 1998) and accommodation, travel, food and other living expenses need to be added to this.

When do you pay the money back?

You will begin paying once you are earning over £21,000 per year.

How do you pay your student loan off?

The payments will be taken out of your salary at the same time as tax and national insurance is taken.

How much will you pay back?

There’s a lot of confusion around student loans and debt. Whilst it is true that tuition fees have increased significantly and that the interest on the loan bumps that figure up. What you repay, in reality has nothing to do with that figure (at least not in terms of day-to-day or monthly salary deductions).

In the simplest terms possible -

You will repay 9% of anything that you earn over £21,000. If you earn £22,000 then you will have 9% of £1,000 (divide this by 12 to see what you’ll pay per month) 9% of 1,000 is £90 so you would pay £7.50 a month.

The bit that everyone talks about (The actual amount that you owe - NOT what you pay back each month)

The bit that goes on in the background, but which everyone talks about is the total student debt figure, which sounds super scary. Student loans incur interest right from the moment that you receive your first payment (So, when you start university) which means that for as long as you owe the money, the total amount that you owe is growing because interest is being added to it. In reality though - this has nothing to do with what you actually pay back each time you receive your pay packet remember.

There are two interest additions to your loan.

The base interest rate if you like is based on the UK Retail Price Index (RPI). This is a measure of inflation. It measures the change in the cost of a representative sample of retail goods and services. The RPI changes*. At the time of writing it was 3.1% but it can go up or down, so it could be different each year. The highest it has ever been is 24.9% in 1975 and the lowest recorded was 0.7% in 2001.

In addition to a percentage based on RPI , interest is added to your loan at a variable rate based on your income, as follows:

If you earn between £21,000* and £41,000 you will pay back RPI (3.1%*) plus between 0 and 3% depending on your salary.

If you earn more that £41,000 you will pay back RPI (3.1%*) plus 3%.

Note - when you start university and receive money you start incurring interest on your loan before you have even finished studying and the rate of interest (whilst you are at university) is set at RPI (at the moment 3.1%) plus 3% (the maximum).