How 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.

Anelda Knoesen
From the Money team
4
minute read
Do you know someone who could benefit from this article?
Posted 18 JANUARY 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. It doesn’t cover the cost of materials, books or equipment – you’ll need to find funding for those 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 35% 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 2020/2021 are:

  • Up to £7,747 if you’re living at home
  • Up to £9,203 if you’re living away from home, outside London
  • Up to £12,010 if you’re living away from home, in London
  • Up to £10,539 if you spend a year studying abroad as part of your UK course
  • Up to £3,893 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.

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.

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

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.

You’ll also be charged interest. The rate of interest depends on the plan you’re on. 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. For anyone on Plan 2 or a postgraduate loan, this is usually the same rate as the RPI, plus up to 3%, depending on how much you earn.

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.

How do I make repayments?

If you’re employed, you don’t have to do anything. Once you’re eligible, repayments will come straight out of your salary each month, 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.

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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