A simple guide to paying back your student loan

Written by The DAS Team
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This information is for UK Undergraduate students only. A student loan can be very confusing; with interest, different plans, percentages and thresholds, it can be tempting to ignore all of the fine print.

Here at Developing a Student, we want to make it easy for you to understand the student loan system. We have broken it down into small clear chunks, hopefully making it less intimidating so you can stay on top of your costs while at university.

Which plan are you on?

The first thing to work out is which plan you are on, as this will determine how much you pay back. Fortunately, there are only two plans, and they are very easy to distinguish.

Plan 1 

You will be on this plan if you are:

– An English or Welsh student, and you started your undergraduate degree in the UK before 1st September 2012.

– Or a Scottish or Northern Irish student, and you started your undergraduate degree in the UK on or after 1st September 1998.

Plan 2

You will be on this plan if you are:

– An English or Welsh student, and you started your undergraduate degree in the UK on or after 1st September 2012.

Thresholds 

Both plans have different repayment ‘thresholds’. This means that you don’t make any payments towards your student loan until you are earning a certain amount; this amount is the threshold.

The current repayment percentage stands at 9%, which means you will pay 9% of anything you earn over the threshold towards your student loan. If your income is under the threshold, then you do not pay anything.

The threshold for Plan 1: £372 a week, or £1,615 a month (before tax and other deductions)

The threshold for Plan 2: £511 a week, or £2,214 a month (before tax and other deductions)

Examples

This might sound complicated at first, but it will be clear after you read the examples detailed below.

Plan 1 Example:

Your annual income is £27,000, meaning that your monthly income is £2,250 (£27,000 ÷ 12 = £2,250).

This means you are £635 over the monthly threshold (£2,250 – £1,165 = £635), so you pay back 9% of £635, which is £57 a month.

Plan 2 Example:

You may be paid weekly, earning a different amount each week depending on your hours. This week your income was £600.

This means you are £89 over the weekly threshold (£600 – £511 = £89), so this week you pay back 9% of £89, which is £8.

Interest

Interest can seem scary; the thought that you are adding a certain percentage every year can make it seem like your debt is growing every year. This is far from the truth.

Most of the time the interest rate is set at RPI. This stands for Retail Price Index and it is a measure of inflation in the UK.

This means that if you borrow the equivalent of the cost to buy 100 loaves of bread, the addition of RPI means that you always owe the equivalent to 100 loaves of bread. If the government didn’t add interest at RPI, the real value of your debt would actually shrink over time.

This means that you pay interest from the first day you start university, but it is not always growing. It is often only staying equivalent to the amount you have borrowed.

Currently, if you are on Plan 1 you pay interest of 1.1%.

If you are on Plan 2, you pay RPI plus 3% until the April after you leave university. Given that RPI is set at 2.6%, those who are currently studying have an interest rate of 5.6%. The April after you leave university your interest rate reduces to being only RPI, so its real value is neither increasing nor decreasing, despite the fact that the amount is going up.

However, once you start earning enough to start paying back your loan (£26,576), interest will begin to be added on top of RPI, up to an extra 3%.

Then you will pay interest based on your income. Use the table below to work out how much:

    Your Annual Income    

Interest rate

£26,575 or lessRPI (currently 2.6%)
£26,576 to £47,835RPI (currently 2.6%), plus up to 3%
Over £47,835RPI (currently 2.6%), plus 3%


Example:

If you are earning £50,000 per year, your rate of interest (ROI) is 5.6%. If your debt up to this point is £40,000, without any payments it would grow to £42,240 that year. However, only £1,040 of this is real value growth, as the rest is just RPI.

Remember that your payments are never impacted by the ROI, only by your earnings, and that your loan is cancelled 30 years after the April after you graduate from university. If you don’t think you will ever earn enough to pay off your loan, your payments will only ever be equivalent to 9% above the threshold.

This amount is similar to the interest added above RPI. In turn, you’re probably only going to pay the extra interest on the loan, unless you decide to pay it all off in one go.

For more information on undergraduate study, visit our dedicated guide for undergraduates.

Last Updated: Friday October 9 2020

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