Repaying Student Loans

Around 400,000 outstanding student loans held by 20 and 30-somethings are shrinking. This is because, from 1 September 2009, the interest rate on these loans became negative - so you'll owe less next August than you do right now - and millions more have become interest free.

This historic event requires a whole new way of thinking. This guide takes you through the changes, how you're affected, and answers all the key questions including the crucial one: "Should I pay off my student loan?". Plus the unique Student Loan Calculator tells you how long it'll take you to repay.

This guide only covers government-issued Student Loans Company (SLC) loans not Personal, Career Development or professional studies loans. For whether to repay those, see the Pay Off Debts With Savings guide.

Negative interest rates

A whole generation of Brits now have student loans; anyone who has started higher education since 1990 was eligible, so even those who left 16 years ago could still have them. And with the massification of higher education, that means nearly four million people in total.

The exact interest rate you pay depends on when you started university.

Who's got them? Anyone who started higher education between 1990 and 1997.

Current interest rate? -0.4%

Number of outstanding loans? 390,000

How's it collected? You need to pay the SLC directly.

Credit rating impact? While having the loan itself doesn't impact your score, the SLC is writing to all late payers, giving 28 days to make contact or it will go on your credit file, causing a substantial impact to your ability to gain credit elsewhere (see the Credit Rating guide).

How it works? You must make repayments if you earn over £27,050. When you start repaying, the amount owed is divided into 60 monthly repayments (or 84 if you took out more than five loans). E.g. if you owed £5,000 you would pay £83 a month (£5,000 divided by 60).

Can you defer repayment? If you earn under £25,937 you need to write to SLC once a year.

Who's got them? Current students and anyone who started in or after 1998.

Current interest rate? 0%

Number of outstanding loans? 3,300,000

How's it collected? By your employer through its payroll. This means it comes out before you've got your wages ( self-employed/more than one job? ). Each repayment is given to HM Revenue & Customs, which passes the cash to the SLC every March. At this point, SLC applies the repayments as if it had received them on a monthly basis, before interest is calculated, so borrowers don't lose out. If you earn over £15,000 and repayments aren't being deducted, it's YOUR responsibility to inform your employer. Ensure you keep evidence of having done this as, if it doesn't start deducting repayments after you've asked, it can be fined up to £3,000 by HMRC - instead of you getting in trouble.

Credit rating impact? None whatsoever. Student Loans never play a role on your credit file. However when applying for a product you may be asked whether you have loans, plus the fact your take home pay is reduced may be taken into account (see the Credit Rating guide).

How it works? It's a much fairer system than the old loans as you repay 9% of everything earned above £15,000. So earn £16,000 and you'll repay £90 a year; earn £30,000 and it's £1,260 a year (see the Student Loan Calculator below for exact info). Yet as payments are usually made monthly, if your salary isn't above the threshold but a bonus or overtime payment pushes your wage over the £1,250 monthly limit, a repayment WILL be deducted from that pay. You can claim it back from SLC, but only at the end of the tax year if your P60 shows your total earnings didn't exceed £15,000. In many ways it's more like a graduate tax than a debt; no-one chases you for repayments and the more you earn the quicker you repay.

Can you defer repayment? Graduates from September 2008's intake and onwards will be eligible to take a repayment holiday of up to two years. The scheme isn't due to begin until 2011, so full details on how it’ll work haven't yet been announced.

Why are interest rates so low?

Every September the SLC’s annual interest rates (see the Interest Rates For Beginners guide) for the next academic year are set. These are based on the inflation rate - which measures how quickly prices are rising - for the previous March.

The specific inflation rate used for student loans is the Retail Price Index (RPI). This includes the cost of mortgages, and as UK base rates had been slashed to a historic low, March 2009’s inflation was at MINUS 0.4%, meaning average prices over the previous year were falling - called deflation.

Due to this, loan costs for those who started higher education before 1998 are now MINUS 0.4% for the next year too. That means if you owe £10,000 in September and repay nothing, it'll still shrink to £9,960 in August. For everyone else, student loans are becoming interest free (0% interest).

Why are the two loans set at different rates?

In our opinion, the answer is quite simply because the Government has failed to honour its pledge to holders of the new type of loan.

While interest-free loans sound great, actually you've been diddled. This March's inflation was -0.4% (deflation) so the interest rate should drop to that for ALL loans. However the Government used a technicality and created a new clause preventing 1998-onward loans from matching deflation (read more about post-1998 loan rate ).

Student loans have always been set using inflation and while 0% loans sound cheap, it means former students' purchasing power is being eroded, as with deflation (prices dropping) loans costs should be shrinking by the same rate.

Financially, the impact’s small: even on a £10,000 loan, it’s only £40/year difference. But the real concern’s the principle. Now we’ve slightly uncoupled ‘inflation’ and ‘student-loan interest’ who knows where it’ll go in the future?

If you object to the rate not following inflation, sign the petition at No.10.

Student loans: the long term cost

Negative student loan interest rates are unprecedented and many assume they'll only last for this year, though of course no one knows for sure.

Yet most people will hold loans for a lot longer than a year, so it's important to understand how the loans work during normal periods of inflation too.

There's no 'real' interest cost because the most you'll pay is the rate of inflation

This means over the long run student loans are the cheapest long term borrowing you're likely to get.

What does no 'real' interest actually mean?

Inflation is the rate at which prices rise therefore if, as in normal times, inflation is positive (eg. 4%), something costing £100 this year will on average cost £104 next year. Now look at the impact of this on the loan:

New student Irma Scholar needs a £1,000 student loan, enough to buy her twenty trips to the supermarket. The loan interest rate is set at the rate of inflation, which over the next ten years averages 4%.

To help me keep this simple, Irma rather conveniently decides to repay it all at once in ten years time, having never repaid a penny before.

The 4% annual increases mean she must pay back £1,480; this sounds like it's expensive, yet everything else's gone up by the same proportion too, wages and the price of goods. So in ten years time £1,480 still buys Irma roughly the same twenty supermarket trips worth of goods.

In other words the borrowing hasn't diminished her spending power at all, she borrowed twenty shopping baskets' worth and repaid twenty shopping baskets' worth.

Compare this to a higher-than-inflation rate loan, then you'd not only pay back a 'basket of shopping's worth' of goods, you'd need to pay actual cash on top.

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Student Loan Calculator: How long will it take to repay?

First you need to know how much you owe; you can view your balance online to find the amount up to the last March. If you've any problems, call the student loans customer support centre on 0845 026 2019 to get the log-in details sent to you (bookmark this page to return to).

If you've made any repayments through payroll since the end of March, subtract those to get a more accurate figure (any voluntary repayments will have been deducted straight away).

This tool gives a rough estimate for students who started uni in or after 1998

Should I pay off my student loan?

In short...

Surprisingly, many bright graduates say, "it's not costing me much, so I'm going to pay it off". This logic's topsy-turvey. Even before these historic interest rate changes student loans were the cheapest long-term debt possible.

A loan this cheap shouldn't be paid off more quickly than is necessary. But what to do with spare cash depends on if you have debt or if you're debt-free

Are you a borrower - even just a mortgage?

There's a golden rule that applies to anyone with multiple debts...

Always focus on paying off the highest interest rate debts first

The reason for this is quite simple, the higher the interest the quicker the debt grows, so you want to get rid of it as soon as possible (see the Pay Off Debts With Savings and Should I Pay Off My Mortgage? guides for a full explanation).

Now that loans are, at worst, interest free and are guaranteed to stay cheap, they're unbeatable. So always pay off any outstanding mortgage, credit card, overdraft or loan first.

Yet even once we go back to normal rates of inflation, the student loan will stay cheap. So unless you're a stoozer (you'll know what it means if you are) that cast iron cheapness beats out even 0% Credit Cards as their availability is uncertain.

Are you a debt-free saver?

In a twist, the interest you can earn in a top savings account outstrips the cost of student loans, especially for basic rate tax payers. So you're better off saving rather than repaying the debt. For example:

Recent graduate Ivor Gudjob has £10,000 of student loan debt, now at 0%. He's debt free and has £5,000 saved up. His choices are putting the money towards his loan, or saving at 2-3% after tax.

Easy calculations show that repaying the loan makes no difference to the interest, but saving makes him £100-£150 over a year. It's a no brainer!

Even when interest rates aren't as low as they are now the Top Cash ISA, where you can save £3,600 per year tax-free, and then the Top Savings Accounts usually pay more than the student loan interest rate anyway.

This means it's usually better to save rather than repaying the student loan debt any more quickly than you need to; often you can make £100s a year profit by doing this. Yet there's a second more important reason...

By paying it off early you risk needing more expensive borrowing from elsewhere later

Even if you have no debts right now, it's possible you will have in the future, be it as a mortgage, for a car or to set up a new business; the list goes on. Providing the debt is planned, budgeted for and at the cheapest rate possible, there's nothing wrong with doing it.

But by paying off your student loan quicker than necessary, you may find yourself replacing it in a few years by a more expensive commercial loan. After all, even a mortgage over the long run costs more than a student loan.

Therefore as student loan debt doesn't cost anywhere near as much as commercial interest, it's worth building up your savings now rather than speeding up student loan repayments, so instead of needing to borrow from banks in the future you can simply use your savings.

The only exception to these rules is for those with no self-control. If you'll just end up spending or wasting the cash, then at least overpaying the student loan is playing it safe. And do remember, you shouldn't ignore the debt or frivolously build up more borrowing.

When are loans wiped?

Another reason not to overpay is the debt doesn't last forever. If it's unlikely you'll clear the loan in time (see the Student Loans Calculator) then you will have paid unnecessarily.

When the loans are wiped depends on when you took it out; the chart below will show you.

Higher Education Start Date	Age at which loan is wiped	Death	Unfitness to work
1990 - 1997 (If aged under 40)	Earlier of 25 years after repayments were due to start or when you reach age 50
1990 - 1997 (If aged 40+)	When you reach age 60
1998 - 2005	When you reach age 65
2006 - Current	25 years from the first April of graduation (when you were first due to repay)
2007 - Current (Scottish residents only)	35 years from the first April of graduation (when you were first due to repay)

All loans are wiped on death. While you may think this is obvious, crucially it means the debt does not form part of your estate. The same is true if you become permanently unfit to work.

What to do if you move abroad

If at any time you move abroad, you're expected to inform the Student Loans Company so you can make repayments directly to it (usually by direct debit). Different repayment thresholds apply in different countries, depending on their national average earnings, so you must provide details of your new salary (see the SLC website's country by country threshold table).

Repayments will be deducted in pounds sterling and you'd be responsible for any costs involved in converting the currency.

There are severe penalties if you move overseas and don't tell the SLC, or chose not to repay your loan by not providing the information it requests to be able to deduct repayments from your salary. These include applying repayments based on an income equal to twice the UK average earnings, and even - in the most extreme cases - demanding you repay the total loan in one go.

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