There has been a flurry of recent changes to the student loan system in the UK, leaving many former, current, and future students looking for clarity on what these alterations mean for them. It’s important to understand the implications of these changes, as they impact the cost and duration of loan repayments, so let’s get into it.
Understanding the student loan system
Before we dive into the recent modifications, it’s vital to appreciate that student loans in the UK differ from traditional loans. Unlike conventional loans that require full repayment, student loan repayments are income-based and written off after a set amount of time. This approach means that at the moment some graduates may never fully repay their loans. This crucial distinction has implications for the broader changes introduced.
The recent changes: what are they?
Lowered repayment threshold
One of the most noteworthy changes is the reduction of the repayment threshold, set to fall from £27,295 to £25,000 for the 2023-24 academic year. As a result, graduates will start loan repayments at a lower income level than previously.
Extension of the repayment period
In addition to the lowered threshold, the repayment period for student loans is extending from 30 years to 40 years. Consequently, graduates will repay their loans over an extended period, meaning that some graduates will not have their loan written off when they expected.
New postgraduate loan scheme
The third change is the introduction of a new loan scheme for postgraduates. Set to be introduced in the 2023-24 academic year, this scheme will offer postgraduates loans up to £12,167 to cover the cost of their studies.
What does this mean for you?
While these changes might initially seem daunting, it’s important to consider their implications carefully. Lowering the repayment threshold means graduates will begin repayments sooner, but remember that the repayment amount is always proportionate to your income.
The extension of the repayment period, while it may seem like a burden, could potentially lessen the monthly repayment amount, spreading it over a more extended period. However, the long-term impact is that you may end up paying more over time.
The introduction of a new postgraduate loan scheme is a positive development, opening doors for more individuals to pursue advanced studies.
Student loans are different from other types of borrowing. You don’t start repaying until you earn over a certain amount, and you’ll stop repaying if your earnings fall below that amount.
How Plan 1 repayments work
You’ll only start making Student Finance repayments once you’ve left your course and are earning enough.
The repayment threshold for Plan 1 loans is currently £22,015/year (£1,834/month or £423/week) before tax.
This threshold has risen in April of each year since 2012, so make sure you keep up to date with the figure. And remember: if you earn less than that in taxable income (wages, freelancing, tips etc.), you won’t pay anything back until you’re back above the threshold.
Once you earn more than the threshold, repayments kick in and you pay 9% on the amount above the threshold. So, if you earn £27,015 (£5,000 above the threshold), you’ll pay 9% of £5,000, which is £450 for the year.
How Plan 2 repayments work
The Student Loan repayment threshold for Plan 2 loans is £27,295/year (£2,274/month or £524/week) before tax. If you earn less than that in taxable income (wages, freelancing, tips etc.), you won’t pay a penny towards your loan until you’re back above the threshold.
Once you earn more than the threshold, repayments kick in and you pay 9% on the amount over £27,295. So, if you earn £31,295, you’ll pay 9% of £4,000 – which is £360/year.
Voluntary repayments are your choice
Whilst you may choose to make voluntary repayments towards your student loan, there’s no obligation to do so.
If you don’t expect to fully repay your outstanding balance during the term of the loan you should carefully consider whether it’s appropriate to make voluntary repayments because any outstanding balance is written off at the end of the loan term.
You should consider your personal and financial circumstances and how these may change in the future prior to making a voluntary repayment.
If you are unsure about your decision to make voluntary repayments, you should seek professional advice from a financial advisor.
A voluntary repayment is non-refundable.
Staying in touch
The SLC will contact you before you’ve repaid your loan to make sure you don’t pay back more than you owe – so make sure your contact details are up to date.
If you leave the UK for more than 3 months, you need to tell them. The amount you repay might be different depending on the country you’re living in.
If you repay more than the total amount you owe, they will notify you in writing that you need to claim your refund. If you don’t claim your refund, they’ll try to automatically refund this back to you – so make sure your bank account details are up to date. Once a refund has been processed, it will appear in your bank account as ‘SLC Receipts’.
Have more questions?
If you have questions about any aspect of your finances, please get in touch with the Trinity team.