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Graduates offered chance to settle pre-1998 student loans by repaying just 20% – but should you accept?

Graduates offered chance to settle pre-1998 student loans by repaying just 20% – but should you accept?

Some university leavers who started studying between 1990 and 1998 have received letters from Erudio – the company that manages their student loans – offering them the chance to settle their loan by paying off as little as 20% of the amount outstanding. Those who started university after this period are unlikely ever to get this type of offer because they have a different type of loan.

MoneySavingExpert.com revealed last year that Erudio was writing to borrowers who weren't earning enough to have to repay their loans, telling them that if they paid off half their balance their "liability" for the rest of the loan would end. And now the firm has upped its offer, telling some it's willing to write off as much as 80% of their remaining loan.

While this may sound like a good offer, if you get a letter, be wary of accepting. It's important to understand that the loan may be wiped before you fully repay it, and partially settling your debt could affect your ability to get credit in future – Erudio has warned that you won't ever be able to get another student loan from the Student Loans Company (SLC).

In most cases, if you've had funding for a degree, you can't get Government funding for more undergraduate study anyway, but there are exceptions, and you can also get a loan for postgraduate study.

Student loans from pre-1998 – known as 'mortgage-style' loans – don't work like modern ones. They're payable over a fixed number of instalments once you start earning over a threshold, currently £30,737 a year. Once over this, the amount you pay doesn't fluctuate based on what you earn, like with loans taken out post-1998 – but the threshold itself is higher than with today's loans.

All student loans are eventually written off – worth bearing in mind before you repay. See Martin's blog: When will your student loan be written off? for full info.

Martin: 'The question to ask yourself is: how long will I earn over the threshold for before my loan wipes?'

MoneySavingExpert.com founder and chair Martin Lewis says while most shouldn't take up the offer, it may work for some.

"It's likely the majority of people who get one of these letters should treat it like it's dirty, hold it by the edge and toss it straightaway in the bin," he said.

"If you've still got one of these loans, it means you haven't paid it off in at least 20 years. So in most cases it's unlikely you'll ever pay any of it back, and even more unlikely you'll pay it off in full. While it may seem tempting to pay a lower figure than the outstanding balance, the loan will eventually wipe.

"Yet as Erudio has significantly upped the percentage it is offering to wipe, from 50% to around 80% for some, there are now likely to be a decent chunk of people, who are temporarily deferring and have a reasonable chance of earning over the £30,737 threshold, for whom Erudio's offer is attractive and will save them money.

"The question to ask yourself is: how long will I earn over the threshold for before my loan wipes? Then work out how much you'd pay over that period, and do the maths. If you'd likely pay more than the settlement figure – settle.

"I'm pleased to see Erudio has taken on board one of my criticisms from last time, that it gave no information of when the loan would wipe, and that's now in the letters."

What do the Erudio letters say?

We've seen reports from at least a dozen graduates or other university leavers who have received a letter from Erudio in the last week. Most offer to let borrowers "partially settle" their loan if they make a one-off payment of about 20% of the loan, though the exact percentage varies and in some cases it's closer to 25%. Erudio then says it will write off the remainder of the loan and the loan will be "closed" if the offer is accepted.

But the letters also warn accepting the offer "may impact" the borrower's ability to borrow money from the SLC again, and suggests borrowers contact the SLC or seek independent legal advice for more info. Borrowers are asked to contact Erudio on 0333 999 7263 to discuss or accept the offer – a deadline is given to do this, generally in early July.

The letters start by telling the recipient that they are "in deferment", ie, not currently paying their loan back. And unlike previous settlement offer letters from Erudio – which MSE founder Martin Lewis has criticised for giving limited info – they explain that recipients may be able to cancel their loans entirely after a certain date (see more on that in How do pre-1998 loans work? below).

Here's one of the letters we've seen:

What are borrowers saying?

Those who have received the latest offers from Erudio have given a mixed reaction. One MoneySaver, who received an 80% settlement offer, emailed us to say: "As always, my first reaction was to look it up on Martin's site and found lots of discussion and Martin's recommendations from 2018, regarding Erudio's offers of [a] 50% settlement deal. Martin advised that generally, it probably wasn't worth taking the option up.

"However, I haven't found anyone yet talking about this increased offer of only having to pay back 20%. It's certainly tempting for me, as although I only have seven years until the debt would be wiped anyway, there's a strong chance I'll earn over the threshold before then, and I would most likely pay the settlement offer figure."

But another, who also received a 50% settlement offer last year and has now had an 80% offer, said: "I'm not doing it this time either – even if I could afford it." 

How do pre-1998 loans work?

Student loans taken out between 1990 and 1998 were bought by Erudio in 2013. The company has been repeatedly criticised by Martin for numerous blunders – see our Erudio to contact graduates again over deferment deadline blunder and Student loan deferment forms missing MSE News stories for more info. 

In brief, loans taken out in this period are paid directly to Erudio in a fixed number of instalments, and you must make repayments if you earn over £30,737 a year.

If you're earning less than this you can 'defer' payments – ie, pay later – though you'll have to apply to do so. See more info here

Like other types of student loans, these loans are written off after a certain period of time – but exactly when depends on how old you were when you took out the loan:

  • Aged under 40 when your last agreement for a loan was made (usually your last year of study)? It'll be wiped 25 years after your first payment of your last loan agreement (usually the start of your final year), or when you reach 50 – whichever is earlier.

  • Aged 40+ when your last agreement for a loan was made (usually your last year of study)? It'll be wiped when you reach 60.

I've got one of the letters – what should I do?

Be careful when deciding what to do, and don't be rushed into a decision. There are several questions to consider when deciding whether to take the offer:

  1. Will you pay back more than the amount Erudio is asking you to pay? Some of those who have received the letter are just a few years from their loans being written off anyway.

    If you're in this situation and don't expect to earn over £30,737 a year any time soon, you can continue to defer, so if you take the offer you might end up paying back money you otherwise would never repay.

  2. Would you be better off paying off other debts first? With the loan interest rate at 3.3%, it's likely any other debts – whether credit cards, loans or hire purchase – would cost you more, so always pay those off before even contemplating repaying your student loan.

If you're still considering taking the offer, it's also worth bearing in mind:

  • It could affect your ability to get credit, although Erudio says it won't for now. Normally when you partially settle a debt, there's a chance it could affect your ability to get credit in future, such as a mortgage or credit card, as credit files can be marked with a 'partial settlement' note. 

    Erudio has told us that it does not report account defaults to credit reference agencies, and in its letters it says: "your credit file will not be affected". But that could change in future – Erudio says it would write to customers before notifying the credit reference agencies that their accounts are in default.

  • By partially settling their account, customers will not be able to receive further funding from the SLC. Erudio says if students require further funding from the SLC in future, they would have to repay the account balance in full.

What does Erudio say?

An Erudio spokesperson said: "We routinely issue settlement offers to customers as part of our standard collection strategies. 

"While we cannot provide financial advice, we do include relevant information within the offer letter – such as frequently asked questions – to support the customer in making an informed choice. 

"Should the customer require further support, we encourage them to contact us directly to help us understand their current and future circumstances in relation to this offer, as we may have alternative solutions based on their individual circumstances."