Yahoo Finance A-level results: seven things you need to know about your 6.1pc student loan
The release of A-level results tomorrow marks the point at which hundreds of thousands of young people begin their final preparations for university.
The vast majority of those students will be taking out a student loan, whether it be to cover their tuition fees, living costs or both.
Tuition fees are now as high as £9,250 annually, with most institutions charging the maximum. Students can borrow up to £11,000 a year for living costs, depending on where they study and their household income.
A typical graduate will leave university with £50,000 in debt based on 2017’s rules according to the Institute for Fiscal Studies.
In theory the loan system is simple. Graduates pay back their loan, plus interest, out of the income they earn above a certain threshold. What isn’t repaid within 30 years is written off.
In practice, however, the loans are fiendishly complex. Telegraph Money has rounded up all you need to know.
How you will repay the loan
Starting from the April after your graduation, you will pay back 9pc of the amount earned over £21,000. If you don’t earn more than that, you will pay nothing.
Currently, that threshold is frozen until at least 2021. That means the effective amount you pay back each year will be going up thanks to inflation.
The freeze was controversial, and it was revealed by this newspaper last month that ministers are under pressure to increase it and link it to inflation or earnings.
The 30 year cut off
Any remaining debt left at 30 years is, under the current system, wiped.
However, the repayment rate and threshold will dictate how much you pay over those 30 years.
Additionally, 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.
How the interest rate works
The interest rate works on a sliding scale, ranging from RPI (retail price index), a measure of inflation, to RPI plus 3pc.
The scale is dictated by earnings. Those earning under £21,000 will be charged RPI only, sliding up to RPI plus 3pc for those earning more than £41,000.
It is RPI in March of each year that the rate is based on. This year, March RPI stood at 3.1pc, so the range of interest is 3.1pc to 6.1pc. This is significantly higher than any mortgage or savings rate currently available, and an increase from last year's 1.6pc to 4.6pc range.
One quirk to be aware of is that you will be charged the maximum interest rate while you are still studying.
The interest rate could matter
For many, the interest rate won’t 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 someone 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.
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.
You will notice the payments
Student loan payments are taken from your pre-tax pay in the same way that income tax and National Insurance are.
Many believe that this means they won’t notice the cash going out. However, it will become abundantly clear any time you receive a pay rise.
Say you earn £25,000, and get a pay rise to £30,000. Based on the current repayment rate, 9pc of that £5,000 would go on your student loan, plus 20pc on income tax and 12pc on National Insurance.
Without your student loan payment, you’d be left with £3,400 of your raise after tax. With the payment, you would be left with £2,950.
In the higher-rate tax band, the combination of 40pc income tax, 2pc National Insurance and 9pc student loan payment pushes the effective rate of taxation to 51pc on every pound earned over the £45,000 higher-rate threshold.
Early payments could save thousands, or cost thousands
If you are set to pay back your loan, and you make early payments, it could save you thousands due to reducing the amount of interest incurred.
However, if you are unlikely to pay it back, and you make extra payments, you will be throwing money down the drain.
The difficulty lies in the fact that nobody knows how much they will earn over their careers, or what future changes to the loan system may be.
This makes it impossible to work out whether making extra payments will be a help or a hindrance.
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