There’s a widespread perception that graduates leave university thousands of pounds in debt. On the surface, that’s true: tuition fees are currently £9,250 per year for undergraduate courses in England, and that’s not including maintenance loans or the accumulation of interest. So you’d be forgiven for worrying about how you’ll repay the loan if you don’t get a high-paying job, viewing university as a gamble that might not pay off.
However, your student loan is not something you need to worry about and it certainly shouldn’t influence your choice of career or employer. The terms ‘loan’ and ‘debt’ are misleading, implying that you have to pay all your fees and interest after graduating, whatever you earn in the future. In practice the system functions much more like a tax or ‘graduate contribution’. The amount you pay back is in proportion to your earnings and most graduates are not expected to ever repay their loans in full.
Student loans explained: how does it work?
Here, we are focusing on student loans for home/EU students studying in England.
- You don’t repay anything unless you earn over the income threshold. The earnings threshold is currently £25,725 a year, £2,144 a month or £495 a week – and you won’t pay a penny of your student loan while you’re earning less than this.
- Once you earn over the repayment threshold, the amount you pay is proportional to your earnings. You’ll pay back 9% of everything you earn above the threshold; interest rates and the total amount borrowed have no effect on this. For example, a salary of £26,725 per year is £1,000 over the threshold, meaning that if you earn this amount, you’ll pay back £90 (9% of 1000) over the course of the year.
- Student loan repayments are treated just like tax. Student loan repayments are automatically taken through the payroll. Because the amount you repay is a percentage of your income over a certain threshold, it’s the same as paying 9% more income tax – essentially paying a slightly higher rate of tax because you’re a graduate. In that regard, worrying about needing to repay your student loan is like worrying about needing to become a higher rate taxpayer!
- If you ever stop earning above the income threshold, you’ll stop repaying. For example, if you lose your job or move to a lower-paying career, you won’t need to worry about how you’ll afford to repay your student loan.
- Any remaining debt is written off after 30 years, no matter how much or little you’ve paid back. The total amount you repay depends on your earnings during that time, so will be different for everyone. The actual amount you borrowed (and how much interest is added) is irrelevant unless you earn enough to pay it all back. If you end up paying little or nothing towards your student loan because you don’t earn enough, that’s perfectly legitimate and does not mean you’ve defaulted on the loan.
- Relatively few graduates will repay their loans in full before they are written off. The Institute for Fiscal Studies estimates that 83% of graduates will never fully repay their student loans. That’s deliberate: the system is designed so that those who gain the most financial success contribute more to their education, subsidising those who earn less.
Money Saving Expert has a more detailed explanation of how student loans work, including how the system differs in Wales, Scotland and Northern Ireland.
Why your student loan shouldn’t affect your career choices
Because the amount you pay for your degree depends on how much you earn, there’s no need to worry about how you’ll pay it off – you won’t repay a penny while earning below the income threshold. Your degree isn’t a waste of money if it doesn’t lead to a high-paying graduate job, because you’ll pay less for it overall. You are free to follow whatever career path you choose and what you pay for your degree will be in proportion to your earnings.
This means you have the freedom to:
- get a graduate job that pays below the repayment threshold
- choose a career that’s unlikely to offer big pay rises within your first thirty years
- choose not to start earning just yet: for example, taking a year out to volunteer or travel
- take a career break later in your life: for example, to have children
- go part time or change career to one that is less well-paid.
All these situations will limit the amount of your student loan that you ultimately repay, and that’s perfectly acceptable. Equally, of course, you might opt to go into a career with very high starting salaries and early opportunities for promotion, resulting in you repaying more of your student loan than you otherwise would – but you’d then be earning more, which would make up for it.
Siobhan graduated from University of York in 2018 and is working in an entry-level publishing role. She told TARGETjobs: ‘I’m not worried about my student debt, as I know it’s something that won’t affect me until I start earning above a certain amount and that I will probably never pay off entirely. If I do end up repaying a good proportion of it, I’m not going to be too annoyed as that will mean I’m on a pretty good wage.’
Why early repayment is unlikely to benefit you
It’s possible to overpay your student loan to clear the debt more quickly (sometimes known as voluntary repayment). However, as you’re unlikely to repay in full anyway, overpayment could mean paying money you otherwise wouldn’t have to. It’s only worthwhile if it’s enough to reduce the amount you’ll pay overall: if you’re a very high earner with no other debts and definitely won’t need the money for anything else such as a mortgage. Overpaying is a big risk because you can never get the money back and if you lose or quit that high-paying job you may wish you’d kept hold of your savings.
That said, there are some common misconceptions about student loans that can make early repayment seem like a tempting option. Make sure you’ve got all the facts before you make a decision by considering the following factors.
- The psychological effect of having ‘debt hanging over me’. As we’ve seen, student loans don’t function like a debt you have to pay back in full. Don’t think about the total amount; just see it as paying 9% of your earnings above £25,725.
- The high interest rate. Being charged interest doesn’t necessarily mean you’ll need to pay it, because you won’t pay any interest unless you fully pay off your original loan within 30 years.
- Your credit score. Unlike most forms of debt, your student loan has no effect on your ability to borrow money in the future. It does affect your affordability score (the measure of whether you can afford to make monthly repayments, when taking out a mortgage or other loan) by slightly reducing your take-home income. However, if you have spare money in savings you can use it to pay a bigger deposit when getting a mortgage, which would mitigate the effect on affordability; that’s a much better use for the money than paying off your student loan early.