seven things you need to know about your loan

Linda J. Dodson

The interest charged on the loan could make the difference between paying it all off before 30 years, and having a debt balance left at the end. 

3. How the interest rate works

Interest starts accumulating when you first take out the loan, so your debt builds up through university.

The interest rate works on a sliding scale. For Plan 2 it ranges from the RPI (retail price index), a measure of by how much prices rise and fall, to RPI plus 3 percentage points. RPI is currently 2.6pc, so the maximum interest you would be charged is 5.6pc. 

The scale is dictated by earnings. Those earning under the relevant repayment earnings threshold, so £26,575 for current graduates, will be charged RPI only. It stops increasing when you start earning more than £47,835, at which point it’s capped at RPI plus 3 percentage points.

The rate each year is based on the level of RPI in March. This year’s interest rate for student loans, which is between 2.6pc to 5.6pc, is significantly higher than mortgage or savings rates. 

On Plan 1 student loans, which students in Scotland and Northern Ireland have, you also pay 9pc on whatever you earn over the threshold. This is currently £19,390 a year before tax. 

The interest rate is usually set by whichever of the following is lowest: the RPI rate from March of the same year or the Bank of England base rate plus one percentage point. RPI is currently 2.6pc and the Bank of England base rate is 0.1pc so the current interest rate on Plan 1 student loans is 1.1pc. 

One quirk to be aware of is that you will be charged the maximum interest rate while you are still studying.

4. The interest rate can matter

Someone with £60,000 of debt and a low wage is unlikely to pay back their loan within 30 years, regardless of the interest rate. For those people, the repayment rate and threshold are the main points of concern.

However, that doesn’t apply to everyone. If you are likely to pay back your loan within 30 years, the variable interest rate could significantly increase the length of time it takes to pay it off, increasing the total cost of the debt.

5. Student debt can impact getting a mortgage

Your student debt won’t affect your credit score, but mortgage lenders have to take your student loan payments into account in their affordability testing.

That means a student debt could negatively affect your ability to buy a house.

6. You will notice the payments

Student loan payments are taken from your pay before you receive it, just like income tax and National Insurance are.

Many believe that this means they won’t notice the cash going out. However, it will become very clear any time you receive a pay rise.

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