Student loans can be confusing.
For one, it is the first time you are dealing with loans and debt. You are also aware that you owe money, but are not entirely sure how much you have to pay each month and what happens if you don’t pay student loans in the UK.
This article will answer the most common questions regarding student debt including how repaying your student loan works and when your debt is cancelled.
The UK student loan repayment is managed by the Student Loans Company (SLC) and you are bound by law to repay it.
Since a student loan is set up as a contract with SLC, it is not considered a tax. This means that SLC can take legal action, forcing you to repay your student debt, plus interest and penalties in a single lump sum. You will also have to pay all related legal fees and civil court costs.
This applies to all graduates, whether they are self-employed or living outside the UK.
Note: You need to repay your student loan only if you earn over the repayment threshold of £27,295 a year.
A student loan will be written off if the borrower has become disabled and permanently unfit to work or if they have died leaving no estate behind.
Cancellation of loans also depends on which repayment plan you are on.
If you are on Repayment Plan 1 and:
If you took out a loan on or after September 2012 or a Postgraduate Loan, your student debt will be written off 30 years after the April you were first due to start repaying it.
A total of £851 million worth of debt was written off in 2020, 10 billion of which falls to student debt write off.
The high level of student loan write off in the UK has forced the government to rethink its policies and introduce new reforms in 2022. Under the new changes, students starting in September 2022 will start paying off their student debts if they earn over £25,000 a year (as opposed to £27,295). Student loans will also get written off 40 years after the repayment due date instead of 30.
Despite having a legal obligation to repay a student loan in the UK, the majority of student debt gets written off. In fact, it is estimated that 83% of graduates are unlikely to repay their student debt in full.
However, since the introduction of the 2022 reforms, the government has readjusted expectations and now predicts that more than 50% of new undergraduates with student loans will repay them in full.
According to the latest statistics, student loans in Great Britain amounted to a whopping £32 billion as of March 2018, accounting for a huge chunk of personal loan debt in the country.
Seen by countries, England has the highest amount of student loans (around £40,000 in 2020) as well as the highest average repayment rate.
|Average student loan debt (2020)||Average student loan repayment rate (2019/2020)|
|Northern Ireland||£23.34 thousand||£800|
When and how a student loan in the UK needs to be repaid, depends on the repayment plan you are on.
Remember that you do not have to make monthly repayments if your income is under the repayment threshold, currently at £27,295 a year, £2,274 a month or £524 a week (if you started the course on or after 1 September 2012).
Once your student finance is paid to your account, you are ‘liable’ for the repayment of the loan, meaning that all the payments you or your university or college receive will need to be repaid (plus interest) once you have finished or left the course.
The earliest due date for repayments is the April after you are done with the course.
Payments are due regardless if you have earned a qualification or left the course before completing it.
Note: Part-time students are due to start repayment either the April after they finish or leave the course or the April four years after the course started (this applies even if you are still taking the course), i.e. whichever comes first. The same principle applies to Doctoral students.
For the majority of graduates, repayments are collected through the tax system as employers deduct amounts from their salary. This means that repayment is determined according to your income, not how much you have borrowed.
How you repay your loans depends on your employment status:
If you’re working within the UK and paying tax, you should tell your employer that you have a student loan, so they can deduct loan repayment from your salary along with tax and National Insurance. Your employer also informs HMRC how much student loan you’ve repaid so that SLC can update your account.
Repayments will be deducted from your salary whenever you get paid, instead of annually. So, if your monthly income varies, so will your student loan payments.
What if you change jobs?
In this scenario, you might receive a P45 with a ‘Y’ in the student loan box from your previous employer, informing your new employer that you have a student loan.
Your employer will then automatically deduct loan repayment from your salary if your new income exceeds the repayment threshold.
Note: UK student loan repayment will show up on your payslip. It’s important to keep these records as evidence for SLC in case your employer stops making payments or goes out of business.
Repayment is made directly to HMRC through the Self-Assessment (SA) system. The amount you’ve repaid is taken as part of your SA bill for the tax, while the repayment rate is based on your gross annual income.
If you are employed and self-employed at the same time, you will make loan repayments in your tax return in addition to those deducted by your employer.
Regardless of whether you’re planning to leave the country temporarily or permanently, you must let the SLC know first, as you will be paying directly to them. Otherwise, SLC can charge penalties on your loan and when necessary, ask you to pay the loan in full, together with interest and penalties.
How much should you pay if you work or live abroad?
SLC will ask you for details about your income and then work out the amount of the monthly repayments. Any conversion costs will be paid by you.
If you refuse to give this information to SLC, you could be charged a fixed amount (determined by the country in which you reside). Bear in mind that this fixed amount could be higher than what you need to pay if you share income details with SLC.
Although you can make voluntary repayments, paying your student loan back early is not recommended.
Paying your debt early is wasted money because it doesn’t reduce the capital amount you will need to repay. So, it’s much better to allocate that money for something else. You could consider investing or saving in a tax-free account like an ISA or using the extra cash to travel or make a deposit on a property.
As with how and when, how much you need to pay depends on your repayment plan and how much you make a year, month or week.
If your income falls under the repayment threshold, your repayments will stop automatically.
However, once your income goes over the monthly or weekly threshold, let’s say you work overtime or receive a bonus, payments will start again.
Interest is charged from the moment you become liable for the loan until the sum has been paid in full or written off.
Interest is calculated daily and is based on the Retail Price Index (RPI), which measures changes in the cost of living in the country, and your financial circumstances.
Here is how much interest you will need to pay:
If you are overpaying for your student loan, SLC will automatically refund you or contact you and advise you on how to get a refund. The HMRC will notify the company you work for so your employer can stop making salary deductions.
Having debts hanging over your head can be challenging, even more so if you are 100% clear on how much and when you need to repay your loans. Hopefully, this guide has answered some of your questions regarding student debt and what could happen if you do not pay back your student loan in the UK in time.
Yes, student loans, like other loans, have to be repaid after you finish or leave the course. The only instance where you don’t have to repay your student debt is if your income is under the repayment threshold.
Yes. Since student loans are set up as a contract, you could be prosecuted if you fail to repay your debt. Even if you are no longer living in the UK and paying tax, you are still liable to pay 9% of your income if your annual earnings are over the local currency equivalent of £27,295. To find out exactly what happens if you don’t pay student loans or you pay them off too early, contact the Student Loans Company.