Repaying Student Loan: A Comprehensive Guide
In this blog post we will take an in-depth look on the topic Repaying Student Loan: A Comprehensive Guide.
Student loan repayment is indeed the ugly side of university life. It’s a daunting debt as it is, but it can even be scarier for the self-employed. As a freelancer, contractor, or small business owner, your student loan repayments will need to be included on your annual Self Assessment tax return.
Don’t know about how to go about managing your repayments? Don’t worry, here’s everything you need to know about paying back a student loan.
Before we proceed let take a look at what a student loan is;
A student loan is the total sum of money that a student receives from the federal government, their state government, or a private company, which they can use to pay for their tuition or other associated school expenses. However, it is termed a loan because they must payback the money with interest after graduation.
Additionally, to scholarships, grants, and work-study programs, many learners use student loans to fund their education. Student loans can be a helpful tool if you use them responsibly. Student Loan Hero, a reputable online student research and information website reports that 69% of students in the class of 2019 took out loans to cover college expenses.
Also, Student Loan Hero’s data also indicates that students in 2019 graduated with an average debt of $29,000. If you are a student intending to borrow student loan to fund your education, we advice that it is best to try to borrow as little as possible to minimize the long-term costs; before committing to a large loan, research starting salaries in your field to determine your ability to pay them back after graduation.
The amount you pay back
The amount you repay is determined by your income, which is your total earnings before taxes and other deductions (including bonuses and overtime).
Depending on how frequently you get paid, you will repay a portion of your income over the “threshold” for your particular form of loan.
Every plan type has a different set of thresholds.
| Plan type | Yearly threshold | Monthly threshold | Weekly threshold |
|---|---|---|---|
| Plan 1 | £24,990 | £2,082 | £480 |
| Plan 2 | £27,295 | £2,274 | £524 |
| Plan 4 | £31,395 | £2,616 | £603 |
| Plan 5 | £25,000 | £2,083 | £480 |
| Postgraduate Loan | £21,000 | £1,750 | £403 |
You’ll pay it forward in either:
If you are on Plan 1, 2, 4, or 5, you will pay 9% of your income over the threshold; if you are on a Postgraduate Loan plan, you will pay 6% of your income over the threshold.
The following examples illustrate how much you might repay based on your salary and kind of plan:
As an illustration
Your monthly income is £2,750 if you are on Plan 1 and your annual income is £33,000.
Compute:
Your income less the Plan 1 threshold, or £2,750 – £2,082, equals £668.
£60.12, or 9% of £668
This implies that you would have to pay back £60 every month.
As an illustration
You receive £36,000 annually, or £3,000 per month, and are enrolled in Plan 4.
Compute:
£1,616 (your income less the Plan 4 cap) – £3,000 = £384
£34.56 is 9% of £384.
This implies that you would have to pay back £34.
If your annual revenue fluctuates
For those whose income surpasses the weekly or monthly cap specified in your plan—for instance, if you receive a bonus or overtime—you will be required to return the loan. If your annual income is below the annual threshold for your plan, you can request a refund at the end of the tax year.
Interest
The plan you’re on determines how much interest you pay. Right now, you are being charged:
- 6.25% if you’re utilizing Plan 1.
- 7.8% in the case of Plan 2.
- If you’re on Plan 4, it’s 6.25%.
- if you’re on Plan 5, 7.8%
- 7.8% in the case of a Postgraduate Loan arrangement.
You can learn more details about:
- the formula for calculating Plan 1 interest and historical interest rates
- the formula for calculating Plan 2 interest and historical interest rates
- the formula for calculating Plan 4 interest and historical interest rates
- the formula for calculating Plan 5 interest and historical interest rates
- interest rates from prior years and the formula used to compute the interest on postgraduate loans
If you have many plan types active
The lowest repayment threshold for each of your plan type and the existence of a postgraduate loan will determine how much you have to repay.
In the event that you do not have a postgraduate loan, you will be required to repay 9% of your salary above the plan type with the lowest level.You’ll only have a single repayment taken each time you get paid, even if you’re on more than one plan type.
As an illustration
You have an annual salary of £26,400, which translates to £2,200 per month, and you are enrolled in both Plans 1 and 2. This is below the £2,274 Plan 2 level but above the £2,082 Plan 1 threshold.
Repayment will be 9% of your monthly income beyond £2,082, as that is the lowest amount among the available plan types.
Compute:
£118 is your income less the lowest threshold, or £2,200 – £2,082.
£10.62 is 9% of £118.
This implies that you would have to pay back £10 every month.
You would only have to refund 9% of your income over the Plan 1 barrier if your income exceeded the Plan 2 threshold. There would be no additional payments required for your Plan 2 loan.
If a postgraduate loan is owed to you
Repayment for any other plan types will be 9% of income over the lowest level and 6% of income over the Postgraduate Loan threshold, which is £21,000 annually.
As an illustration
You earn £28,800 a year, or £2,400 a month, and have two loans: a Postgraduate Loan and a Plan 2 loan. This exceeds both the £1,750 Postgraduate Loan requirement and the £2,274 Plan 2 threshold.
Compute:
£2,400 – £1,750 (your income less the maximum amount of a postgraduate loan) = £650
£39 is 6% of £650.
£126 is your income less the Plan 2 threshold, or £2,400 – £2,274.
£11 is equal to 9% of £126.
This implies that you would have to pay back £50 every month.
If you work at multiple jobs
Repayments will only be made from jobs that pay more than the maximum amount allowed by your plan type; your total income will not be repaid.
As an illustration
You work two jobs and have a Plan 1 loan. You get £1,000 a month from one employment and £800 a month from the other, before tax and other deductions.
Also, you won’t be required to repay anything because neither of your salaries exceeds the £2,082 monthly cap.
As an illustration
You work two jobs and have a Plan 2 loan. You get £2,300 a month from one employment and £500 a month from the other, before tax and other deductions.
Because it exceeds the £2,274 level, you will only be required to repay the money from the employment that pays you £2,300 per month.
If you work for yourself
HMRC, or HM Revenue and Customs, will calculate the annual repayment amount from your tax return. Your annual income will determine how much you have to return.
HMRC will subtract any repayments you have previously paid from your paycheck from the total amount you must refund.
Additional options to pay off student loans more quickly
Look for opportunities throughout the year to increase your payment or make larger, one-time payments if you are unable to make an additional payment on your student loans each month. Here are a few things to think about:
- Unexpected wealth: Windfall funds may be received as an inheritance, gift, work bonus, or settlement from a court case. This money can be used to cover an additional student loan payment.
- Reimbursement for taxes: You may receive a federal or state tax refund when you file your annual tax return.
- Pay increases: You can put the extra money you receive each paycheck toward your student loans if you receive a raise.
All of these strategies are excellent for reducing your student loan debt more quickly,
but make sure you’re not sacrificing other important areas of your budget. Debt with a higher interest rate, such as credit card debt, will ultimately cost you more. Prioritizing additional payments toward this debt before taking on your school loans head-on may be a good idea.
In a similar vein, aim to develop your emergency fund and retirement savings before paying off your student loans more quickly if you haven’t been able to do so.
Frequently Asked Questions
How much time will it take to settle my student loan balance?
A student debt takes ten years to pay off on the usual repayment plan. However, if you modify your payback schedule, it may go longer. Income-driven repayment plans, for instance, may continue up to 25 years.
How soon may my student debt be paid off?
A student loan can be repaid as soon as you have the money to do so. Prepaying a student loan early will result in lower total repayment costs as there is never a penalty.
When will my student loan be paid off?
If you’re on an income-driven repayment plan, your student loan will be paid off when the entire amount owed is paid off or your repayment term ends, whichever comes first. You can find out when your student loan will be paid off by using a student loan payoff calculator, which will require your current loan balance, interest rate, and monthly payment amount.
Repaying student loan self employed
If you are self employed, HM Revenue and Customs (HMRC) will work out how much you pay from your tax return. You pay at the same time as you pay your tax.
Student loan self-employed calculator
If you’re self-employed, repayments are calculated from your tax return and payments are made at the same time as you pay tax (31 January). You’ll need to register with HMRC, file a tax return and pay. However, this website called Untied helps with all this and you can for their service via this link Sign up here for a free 30 day trial.
Also, If you complete and return your 2022/23 Self Assessment form to HMRC by 31st October 2023, HMRC will calculate how much you need to pay for student loan repayments, as well as the usual tax and National Insurance contributions. You can get your accountant to perform these calculations for you.
Your tax liability must be paid to HMRC by 31st January following the end of the tax year. HMRC will pass the details of your student loan repayment amount to the Student Loan Company, who will update your loan account accordingly.
What is the minimum payment for student loans?
Are student loan payments monthly?
How long does it take to pay student loans?
How much is the monthly payment on a $70,000 student loan?
What happens if you miss a student loan payment?
How is a student loan paid?
For Example; you can borrow money for your tuition fees and for living expenses. A tuition fee loan goes towards the cost of your course, up to a maximum of £9,250 per year – which is the full cost of tuition in most cases – and is paid directly to your university or college.
A maintenance loan helps with the everyday costs of being a student like accommodation, food and transport. It’s paid directly into your bank account in instalments at the start of each term.
Is student loan interest monthly or yearly in the UK?
Your student loan interest is calculated daily as well as monthly.
You’re charged interest from the day you receive your first payment or to your university or college until your loan has been repaid in full or cancelled. however, the interest is added to your balance each month.
How much is a student loan UK per year?
The tuition fees are capped at £9,250 per year while maintenance loans are up to £13,348 to help with living costs.
In England, tuition fees are capped at £9,250 per year. Student loans of up to £9,250 a year are available to cover tuition. Loans are repayable when you’re earning at least £25,000 per year. Maintenance loans of up to £13,348 can help with living costs.
What is Plan 1 student loan?
Plan 1 loans are older loans (from England or Wales) and loans taken out in Northern Ireland. While loans taken out in Scotland are called plan 4 loans. It is also important to note that there is a newer type of student loan, called plan 5, which includes most loans taken out in England from August 2023 onwards.
How long do UK student loans last?
When you’re 65, or 30 years after the April you were first due to repay.
The loans for your course will be written off when you’re 65, or 30 years after the April you were first due to repay – whichever comes first.
What are the four types of student loans in the UK?
There are currently 4 types of student loan in operation in the UK and they are as follows:
- Student Loan Plan 1 (SLP1) introduced from 6 April 2000.
- Student Loan Plan 2 (SLP2) introduced from 6 April 2016.
- Student Loan Plan 4 (SLP4) introduced from 6 April 2021.
- Postgraduate Loan (PGL) introduced from 6 April 2019.
What happens if you don’t pay student loans in the UK?
Can foreigners get student loans in the UK?
If you are an international non-EU student, it’s unlikely you will be able to get a student loan from the UK Government. Also, some universities will create their own student loan schemes for talented students from low-income backgrounds, including non-EU students.
Do I have to live in UK to get student loan?
What makes you eligible for a student loan in the UK?
But whether you qualify for student finance depends on the following:
- your university or college
- your course
- if you’ve studied a higher education course before
- your age
- your nationality or residency status
