For most people, their first experience with debt is through university. It can be nerve-wracking and intimidating to be in debt with no prior knowledge of how to deal with it. However, the situation is not as dire as it seems, and thousands of students carry their student debt for decades. What comes as a comfort to many students is the time limit of the debt which virtually expires after 30 years and how uncommon it is to fully pay it off.
In short, not paying off your loan is a common thing that most students go through. The interest is high and your salary is unlikely to suffice in order to pay this loan and rid yourself of the debt. As a result, it is better think of the loan as a tax that the government takes out of your salary every month, year, or week. Thinking of it this way makes the idea of being in debt much less daunting and more of a fee that gets taken in the background.
This article will get you to grips with the student loan repaying process while helping you understand the consequences of not paying it off. It is a lot less scary than it seems so read on to find out.
What if You Do Not Fully Pay Your Student Loans Back?
The first thing to know is that very few students pay off their student loans completely due to a variety of different reasons. Click here to find out more. The main ones are attributed to the high interest rates coupled with the relatively high repayment threshold which will be expanded upon in the second section of this article.
The best way to think about the loan is as a tax. The money is removed from your salary before it even reaches your account so there is no confusion or effort on your part. The portion removed is often relatively small compared to your total salary. As a result, it is very unlikely that you will pay off your debt.
To put things into perspective, Student A does a 3-year course at University X for a cost of £9,250 per year. They took out a maintenance loan of £6,378 so, by the time they graduate, they will have amassed at least £46,884 of debt (pre-interest). As you can see, the numbers add up quite quickly and you may start to wonder how Student A will ever pay it back on an average graduate salary.
This is a cause of concern for many students, typically those just starting university, as they are likely to have been told that being in any kind of debt can only lead to trouble. Understandably, it can be a problem for those who are uninformed on the inner workings of student debt and are unaware that most people have them written off before getting anywhere near the full payment.
How Many Students Pay off All Their Debt?
One thing that a surprising number of students do not know is the fact that your student debt is wiped 30 years after leaving university. I say “leaving” and not graduating here because you are still obligated to pay any loan you took out during university, regardless of if you graduated or not.
According to this article by the BBC, 83% of university leavers will not be earning enough to clear their debt in full. As discouraging as that may sound, it should be a clear indicator that paying back your student debt is not common practice.
How Does Student Loans Affect Your Credit Rating?
In terms of credit rating, as long as you make your payments on time, your rating will remain unharmed. It does not show up on your credit report. However, when it comes to applying for mortgages, your lenders may request information on the progress of your debt to see how much they will consider lending you.
They do this so that they can work out how eligible you are to take on more debt and if you are capable of making the payments responsibly. Aside from this, however, not paying off your debt is unlikely to stop your taking out a mortgage on a house or a loan for a car.
How do You Pay Student Loans?
For those of you who are not aware of how the repayment process of student loans works, read ahead to find a brief explanation. More information can be found on the government website.
As soon as you take out your loan at the beginning of the year, the interest begins to accrue or grow. By the time you graduate, you will have already collected at least 3 years of interest from your first loan, depending on your course length. The current average interest rates as of 2021 are 5.6%.
How Much Are the Student Loan Repayments?
The amount you pay off depends on how much you earn. This is because of the repayment threshold which changes year to year. The threshold determines the minimum you must be earning before you can start paying back any money.
Currently, the threshold is at a total of either £27,295 a year, £22,274 a month, or £524 a week and 9% of whatever you make over that will be taken away to contribute towards the repayment.
When you do more research into student loans, you will start to see this year/month/week split more often. The reason for this is to make it easier for those who are paid at different rates or different amounts. For example, a self-employed person may be paid a certain amount one week and then less than the threshold the next week.
With that said, the percentages mentioned earlier are not taken out of your entire salary. This is where the threshold comes in. Say you are earning £624 a week. That is £100 over the weekly threshold. In this case, only £100 will be taken into account for the repayment process each week. Using the percentage of 9%, that means £9 will be taken out of your salary for that week.
How Does a Change in Your Financial Position Effect Paying Back Your Student Loans?
If your financial situation changes or your employment details need to be amended, you will have to update these details on the government website. This is to ensure you are charged the correct amount if your salary increases or drops. Other circumstances in which you may be required to make changes are if you stop working or are leaving the UK for more than 3 months.
Your loan and the repaying of it is handled by the Student Loans Company in the UK. You are legally obligated to make payments and, not doing so will permit the Student Loans Company to take legal action against you. This may manifest itself in the form of a court order to collect the debt, plus interest and all other penalties.
When Do You Start Paying Your Student Loans?
When taking a full-time course, you will start the repayment process on the April after you finish or leave your course, provided you earn over the threshold. For part-time courses, you will begin repaying either on the April four years after you start or the April after you finish, whichever comes first.
One situation you may find yourself in is involuntarily overpaying. This is when too much money has been taken from you or you started making payments before you needed to. If this is the case, HM Revenue and Customs are obligated to inform your employer of the mistake. The Student Loans Company will try to contact you in some way and refund you automatically via bank transfer.
This is why it is vital you keep your contact details up to date so you can be issued a refund as soon as overpayment has been detected. It will take around 4 weeks for the salary deductions to cease and amendments to be made to how much you are expected to pay if anything.
Furthermore, you should be keeping track of how much you are required to pay. Like any other tax, there is a chance you may be overcharged which entitles you for a refund.
If you are not paying attention to your debts and finances, you may be losing out on potential refunds. Refunds can be requested directly from the Student Loans Company at these contact details. Ensure you have your Customer Reference Number on hand so they can identify you and your account correctly.
Should You Pay Your Student Loan Early?
When faced with a seemingly infinite debt after the joy of graduating, you may be tempted to get rid of it as soon as possible. However, student debt may be one of the only debts you are advised to not pay off completely. In other words, trying to repay your debt when your income is not exceptionally high is not always the way to go.
You are allowed to overpay your loan at any point if you wish, providing that you earn over the threshold. Keep in mind, however, you will not be able to collect a refund of this voluntary overpayment if you change your mind.
Before making the choice to overpay, you should consider if it will actually make a difference to the total amount you will pay within the 30 years.
Think of it like a race against interest. You may want to throw as much money as possible at your debt but, when the interest rate makes your loan larger, the extra money will be rendered obsolete, and you will be back to square one.
What Should You Consider Before Paying Back Your Student Loans Early?
According to this article by The Guardian, a student should ideally only be overpaying if they manage to land a job with a salary of at least £40,000 per year. Not only that, but also, they should be expecting large bonuses or regular pay rises throughout their career. All that within the time frame of less than 30 years. You can begin to imagine how repaying the debt is relatively unattainable for the majority of students.
After considering that, the next thing you should be aware of is the certainty of your future earnings. As hard as it may seem, you will need to contemplate how much money you foresee yourself making in the next 30 years.
Will you be getting a promotion? Are you going to have children? Changing profession? These are the questions you will need to ponder upon because, for example, if you overpay and then lose your job soon after, you will have given away money for no gain in the end.
To reiterate, unless you are certain you will chance upon extreme wealth consistently over the next 30 years, it is not likely to do you any good by overpaying your loan.
Common Misunderstandings with Student Loans
The biggest misunderstanding which leads people to overpay is that what you owe will change how much you pay. This is not at all the case with student loan because of the threshold. Whether you owe ten pounds or ten thousand pounds, only 9% of what you earn over the threshold will be taken off. This is again why it should be thought of as a tax rather than a loan.
Your salary determines how much tax you pay to the government and repaying your student loan works in the exact same way. With normal loans, you would want to pay it off as soon as possible to avoid accruing too much interest. However, as previously explained, this is not something you want to be doing with student loans.
There are many online tools available to help you calculate your student loan repayment. Here is one in which you enter your salary, remaining debt and even graduation year to ensure the percentages are accurate. Tools like these will be useful in avoiding the headache of doing the maths on how much you owe.
Can Student Loans be Passed on or Cancelled?
In no circumstances are loans passed on to another person for them pay off in your place. You can, however, receive help from family members or friends who do not expect repayment. You can use this to overpay but, as you have already read, this is not recommended.
Can Student Loans be Cancelled?
It is possible for student loans to be cancelled in extenuating circumstances. One situation in which student loans are written off is if the student has died. In this case, the Student Loans Company will need to be informed of the death and be provided with evidence. This evidence could include the original death certificate or coroner’s certificate stamped by the coroner.
Another situation is if the student is unable to work due to severe illness or disability. If you become permanently unfit to work in some way or another, the Student Loans Company may be able to clear your debt.
Similar to the first situation, the student will need to provide evidence of this such as some form of doctor’s note or a letter of assessment from the student’s benefits agency.
In this situation, the student may not be capable of sending the evidence themselves. Here is when a third party is permitted to take control and the Student Loans Company is able to accept information from them. However, this third party must have power of attorney over the student.
In both situations the student will need to supply their Customer Reference Number. This should have been given to them when they applied for financial support from the Student Loans Company. You should be able to find this code on any letter they have sent you.