Andy Coates Blog

Since my post last year about paying off student loans straight away I have had allot of searches and emails asking some basic questions about them. So here is a rundown about how much interest you generally pay, when you need to pay it back, and if you really need to pay it back!

First of all, a student loan is probably the best loan you will ever get due to the fact that the interest you pay only starts to be charged after you graduate, and even then this interest is relatively low (although it has increased to 4.8% recently due to increases in inflation. With your student loan not only do you get a good rate of interest compared to credit cards and bank loans you only start paying it back once your earnings are over £15,000 per year! And it gets even better, you only get charged 9% on any earnings over £15,000 which means if you earn £16,000 per year you only pay back 9% of the £1,000 over your earnings threshold which will be £90 per year, equal to 1.74 per week!!!

What interest is charged on my student loan?
Interest on student loans is currently (April 2008) charged at 4.8% calculated from the 1st of september untill the 31st of august each year from when you graduate.

When do I need to pay off my student loan?
You are only legally obliged to pay off your student loan once your annual earnings are above the threshold which is currently set at £15,000. If you consistently earn below this until you are 65 your loan is automatically canceled.

How much do I need to pay and how do I pay?

Once you earn over £288.46 per week, calculated on the current annual threshold of £15,000 per year, your employer will automatically deduct 9% of whatever you earn over this threshold and send it to the student loans company. If you are self employed it is your responsibility, or your accountants if you have one to calculate what you have earned over the threshold for that year and send 9% of it to the student loans company.

Can I make overpayment's?
Yes you can and it is as easy as transferring money to another account, call the loans company for details. Also, it is always a good idea to keep onto of the interest, even if you only pay £10 per month you will be lowering the rate your debt will grow.

Is it worth paying my loan off in one go?
Generally if you have the money and you have debt it is a good idea to pay off your debts before you begin saving but with student loans things are a little different. Because the interest charged is comparatively low on your student loan to the interest you would receive in a savings account you would earn more interest on saving the equivalent money in a savings account than you would be charged interest on your debt. If that sounded a little confusing here is an example, say you have a student loan debt of £1,000, on this you will be charged interest of (4.8% of £1,000) = £48 per year. Now if you had £1,000 in a savings account you would get an average current interest rate of about %5.8 which would earn you £58 per year in interest. I know £10 doest seem much but over the long term it can amount to a huge difference. Check out my post on compound interest.

Will my student loan affect my credit score?
Credit reference agencies do not take into consideration your student loan so this will not affect your credit score. The only time you outstanding balance of you student loan may affect you borrowing money is when your ability to repay is calculated, e.g mortgages etc...

When will my student loan be canceled?
If for any reason you don't pay off your student loan due to consistently low earnings your student loan is wiped clean 25 years after the April which you graduated or when your reach 65. Also if you become permanently unfit to work your loan is wiped clean.

What if I move abroad?
If you decide to move abroad and still have a student loan debt you are expected to inform the student loans company and arrange to continue payments manually via direct debit from whichever country you decide to emigrate to.

What if I dont pay off my student loan?
Beware of this one as there are serious penalties if you decide not to pay off your student loan by not disclosing your earnings or any other reason. This can include paying allot more interest than the current rate (sometimes triple), calculating your repayments by doubling your declared yearly income figure or even asking for the whole lot to be payed in one go!