Student Loans – How do they work?


The first topic to be introduced as part of our Personal Finance feature is UK student loans and how they work.
There is a common misconception amongst students surrounding tuition fees and the copious amount of ‘debt’ that follows. However, it is not the same as a typical debt as the student loan is only repaid when earnings exceed the given threshold of £25,000 a year, £2,083 a month or £480 a week; and is written off after 30 years. The miscommunication of terms such as debt act as a deterrent for many young people and their parents when considering applying to university, so, here are the main things you need to know about student loans.

Interest rates

Whilst studying at university, an interest rate is applied to student loans. Currently, this is an interest rate of 6.3% (RPI plus 3%) and will apply up until the month of April after leaving the undergraduate course.
From 6 April after leaving the course and up until the loan is repaid in full, there is a variable rate applied which is dependent upon the individual’s income. Where income is £25,000 or less, the rate is RPI (3.3%). The rate then escalates on a sliding scale up to 6.3% where income is £45,000 or more.
Once you reach the repayment threshold, only 9% of your income over the threshold will be repaid every month.
With their low interest rates and generous repayment terms, student loans may actually seem like one of the least worrying forms of debt.

Implications of student loans

After graduating, the misconception with student loans often continues. It is of widespread belief that having a student loan repayment carries implications with your credit score – but remember, student loan is not the same as a typical debt.
Student loan repayments do not appear in an individual’s credit history, therefore there are no implications whatsoever. This also extends to applications for credit cards – student ‘loans’ are not acknowledged.
One noteworthy aspect that is affected by student loans however, is mortgage applications. Nevertheless, it does not prevent an individual from getting a mortgage. For example, lenders will consider the amount of an individual’s student loan repayments in order to assess the debt to income ratio and therefore establish the amount that the individual can afford to pay for the mortgage.  Just as they do with other factors of an individual’s income.

Nakisha Bains

References

https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news-parliament-2017/student-loans-report-published-17-19/
https://www.slc.co.uk/students-and-customers/loan-repayment/interest-rate-and-threshold-changes/threshold-changes.aspx
https://www.slc.co.uk/students-and-customers/loan-repayment/grant-and-loan-overpayments.aspx
https://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes/

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