Ho do student loans work?

Before you go to university, you’ll most likely be looking to borrow money to fund your higher education.

A government student loan could help with your finances while you’re studying – and the good news is that you don’t have to start paying it back until you’re earning a certain amount.

So how do student loans work? Let’s take a look.

Before you go to university, you’ll most likely be looking to borrow money to fund your higher education.

A government student loan could help with your finances while you’re studying – and the good news is that you don’t have to start paying it back until you’re earning a certain amount.

So how do student loans work? Let’s take a look.

Rob Silvey
Money expert
9
minute read
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Posted 25 NOVEMBER 2021

What is a student loan?

A student loan provides a way for undergraduate and post-graduate students to borrow money to fund their higher education.

Going to university can be very expensive. Tuition fees alone can cost over £9,000 a year. With accommodation and living expenses on top of that, it’s easy to see why it’s necessary for most students to take out a loan.

The government-owned Student Loans Company (SLC), sponsored by the Department for Education, administers student loans with affordable repayment plans to higher and further education students in the UK.

Eligible students can benefit from a subsidised rate to help cover living costs and tuition fees. Repayments are then based on how much you earn once you start working.

SLC student loans are by far the most popular way for students to fund their university costs. According to government figures for England, more than £17 billion is loaned to around 1.3 million students each year.

What does a student loan cover?

There are two types of student loan you can apply for:

  • Maintenance loan – this covers accommodation and living costs while you’re at university. It’s paid directly into your bank account at the start of each term.
  • Tuition fees loan – this covers the cost of tuition fees and is paid directly to your university or college.

What else do students have to pay for?

Your student tuition loan won’t cover the costs of things like books, materials or equipment. However, you can use the maintenance loan to cover some of these expenses. However, if you’re living away from home, the maintenance loan is often used to cover the cost of accommodation, utilities, food and other essentials. Sometimes students find that their maintenance loan won’t stretch far enough to cover essential costs, before things like books and equipment are taken into account. The maintenance grant, which students used to use to cover extra expenses, was scrapped by the UK government in 2016. This means you’ll need to fund these things yourself.

How much will my student loan be?

Tuition fees loan
You can borrow up to £9,250 per academic year, depending on the tuition fees set by your university or college. Students on an accelerated degree course could get up to £11,100. The maximum amounts that universities can charge are set by the government and can change over time.

Maintenance loan
The amount you can borrow depends on whether you live at home or away. It also depends on your family income – so if you’re living at home with your parents, their income will be taken into account. As a percentage of the maintenance loan is means-tested, you might not get as much if your annual household income is high.

The maximum amounts for maintenance loans 2021/2022 are:

  • Up to £7,987 if you’re living at home
  • Up to £9,488 if you’re living away from home, outside London
  • Up to £12,382 if you’re living away from home, in London
  • Up to £10,866 if you spend a year studying abroad as part of your UK course
  • Up to £4,014 if you’re a mature student over 60 on the first day of the first academic year of your course

To help you estimate how much maintenance loan you could get, use the student finance calculator that’s relevant to the country you’re from:

Students from England or the EU

Students from Scotland

Students from Wales

Students from Northern Ireland

Am I eligible for a student loan?

You can apply for a student loan if:

  • you’re a UK national or have ‘settled status’
  • you normally live in the UK and have been living in the UK for the past three years
  • you’re enrolled full-time on your first higher-education qualification (or part-time if you’re studying at least 25% of an equivalent full-time course)

If you’re not a UK national, you might still be eligible if you’re:

  • from an EU country
  • under 18 and have lived in the UK for at least seven years
  • over 18 and have lived in the UK for 20 years, or at least half of your life

If you’re an EU national and your course starts on or after 1 August 2021, you’ll need settled or pre-settled status under the EU Settlement Scheme to get student finance funding.

If you’re not eligible for student finance, there are some alternatives available:

  • Scholarships – these are rare and naturally highly sought after, but a successful scholarship application will cover all of your studying costs for you.
  • Private student loan – just because you’re not eligible for student finance, doesn’t mean you’re not eligible for other types of student loan. There are a number of private student loan companies available that can help fund your studies. However, these companies don’t offer the same type of deals as student finance, which can make them much more expensive.
  • Defer – if you’re not eligible for student finance because you’ve not been in the UK for long enough, deferring for a year or two could be all you need to do to get the funding you need. It might pause your career plans, but better late than never.
  • Degree apprenticeships – apprenticeships are increasing in popularity because it offers a way to earn a degree-level qualification without racking up the cost. Degree apprenticeships allow you to work while completing your qualifications, with your employer picking up the tab. While it’s not the university experience, it offers a similar end result.

Did you know?

Student loans don’t get marked on your credit file, so it shouldn’t affect your credit rating when applying for a loan or credit card.

How do I apply for a student loan?

You can apply for a student loan via the government website. Once you’ve submitted your application, you should receive notification by post in around six weeks. It should also confirm how much you’ll get.

When should you apply for Student Finance?

Ideally, the sooner the better. The application process can take a while and lots of other students will be applying alongside you. You don’t have to have a university place confirmed to apply for student finance. You can also apply for student finance up to nine months after the first day of the academic year.

Here are the deadlines for when you need to have applied by:

Course starts

Deadline

Between 1 August and 31 December

31 May after your course started

Between 1 January and 31 March

30 September after your course started

Between 1 April and 30 June

31 December after your course started

Between 1 July and 31 July

31 March after your course started

How do student loan repayments work?

You’ll need to start paying back your student loan, plus any interest, from the April after you finish your course. You’ll be put on a repayment plan, which depends on where you’re from and when you started your course. There are three repayment plans:

  • Plan 1
  • Plan 2
  • Postgraduate

If you’re an undergraduate, the plan you’re put on will depend on where you live and when you started your course.

The good news is that you won’t have to start making repayments until your annual income before tax is over a certain amount:

  • Plan 1 - £19,390
  • Plan 2 - £26,575
  • Postgraduate - £21,000

These figures are correct at the time of publishing on 25 November 2021

If you’re on a Plan 2 loan, it’s very important to let SLC know about any changes to your personal details. If you don’t, an interest rate of RPI plus 3% will be added to your loan no matter how much your income is.

You can find out more about repaying your student loan at www.studentloanrepayment.co.uk.

How much are the repayments?

Once your earnings reach the threshold for your plan, those who took out an undergraduate loan will need to repay 9% of everything you earn above that each year. For postgraduate loans, it’s 6% of earnings over the threshold. So, the more you earn, the higher your repayments will be.

For example, if you’re on Plan 1 and your annual salary is £22,000:

  • £22,000 is £2,610 above the £19,390 plan 1 threshold
  • you’ll need to pay 9% of £2,610
  • your repayment for that year will be £234.90

If you lose your job or take a pay cut, your repayments will stop. You’ll only need to start paying again if your income goes above the threshold.

If your earnings never top the threshold, you’ll never have to pay anything.

If you have both a Plan 1 or 2 loan and a postgraduate loan, you’ll have to pay the amount required for both loans over their respective thresholds.

What is the interest rate on student loans right now?

If you started an undergraduate degree after 1 September 2012, you’re on a Plan 2 student loan. For Plan 2 and postgraduate loans, the interest rate is usually the same rate as the RPI (1.5% in 2021), plus up to 3%, depending on how much you earn after graduating.

If you’re on Plan 1, the interest rate charged is either the Retail Price Index (RPI) or the Bank of England base rate, plus 1%, whichever is lower.

How do I make repayments?

If you’re employed, you don’t have to do anything. Once you’re eligible, repayments are automatically taken from your salary, just like PAYE.

If you’re self-employed, you’ll need to include your student loan when filling out your self-assessment tax return each year. The student loan repayment will be based on your gross annual income over the threshold of the plan you’re on.

If you move abroad after your course, you’ll need to make payments directly to SLC. You’ll be charged in GBP and will be responsible for any conversion fees and transfer costs.

Can I pay off my student loan early?

Yes, you can. If you choose to pay off your student loan early, you won’t be charged an early payment penalty. You can also make additional voluntary repayments at any time.

When can a student loan be cancelled?

If you become disabled or permanently unfit for work, your student loan may be cancelled and you won’t have to pay it back.

Determining exactly when your student loan gets written off, and any remaining debt wiped out, depends on which repayment plan you’re on. The majority are written off when you are 65, or 30 years after you took out the loan.

To see what applies to you, check the government student loan website.

If someone with a student loan dies, the Student Loans Company will cancel the loan. You’ll need to send the SLC a copy of the death certificate and the person’s Customer Reference Number.

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