After graduating, it’s time to face the financial music. All those student loans, which might have felt like free money at the time, are now your debt. Once you’re forced to make repayments, those debts will become all too real.
Again, there are country-by-country differences applying to the loan and repayment conditions.
For borrowing up until 1 September 2012, all UK students incurred loan interest and were required to make repayments in line with ‘Plan 1’. The rate of interest for Plan 1 loans is currently 1.25% (APR) and you need to start repaying once you earn £17,775. You repay 9% of your income each year above this threshold. Scottish and Northern Irish students still borrow under Plan 1. Any debt still outstanding 35 years after you first became eligible to repay, is written off.
If you borrowed in England or Wales, on or after 1 September 2012, then you will have borrowed under ‘Plan 2’. Plan 2 has rates of interest up to inflation (RPI) plus 3% - currently this totals an enormous 6.1%. Repayments are made at a rate of 9% of income over a threshold of £21,000 a year. Any debt still outstanding 30 years after you first became eligible to repay, is written off.
In many cases, students will never earn enough to repay their loans. For example, if you borrowed under plan 2 but don’t earn enough to make repayments, interest will still be added. Due to the effects of compounding, a 6.1% rate of interest will more than double the amount you owe if you don’t make repayments for 12 years.
Working out what you owe when you’re working
Once you are settled into the world of work, you can make a reasonable projection of your future earnings out to your mid-50s (when most loans are written off). You can then project the amount you owe, adding interest and deducting 9% of your projected earnings over the threshold each year.
This exercise will give you an idea whether you will still have debt outstanding or whether your debts will be repaid within the 30/35-year time limits (or you may be on the borderline). Use the outcome to help you decide whether to make extra repayments. For example, if it is reasonably clear that you will earn enough to repay the loan well before the time limit at which it is written off, then you may want to overpay so that the loan is repaid even earlier. This will mean you pay less interest. On the other hand, if you will still have a whopping debt after 30/35-years, you may decide to just make the minimum payment necessary. Why bother trying to save on interest when it will be written off anyway?
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