So, you've received your first student loans statement but what's this? You're being charged interest? Don't panic. Student loans are still the cheapest way to borrow money. Read on to find out more about paying back your loan.
It can be quite a shock for students once they graduate to find that they are suddenly being charged interest on their student loan. Of course your student loan isn’t free money but nor is it a bad way to borrow.
Borrowing money at a low interest rate to invest in something that will help you make money is an example of good debt. Your student debt is therefore good debt because you come out of uni with a degree that will hopefully boost your earning potential.
Student loans are the best way to fund your studies because you pay a low rate of interest, which covers only the cost of inflation. This means that in real terms you repay no more than what you borrow. Depending on inflation rates, you may even find that you pay no interest on your loan.
Whatever the rate change, you won’t find another loan that is this cheap. The Government makes no profit at all on student loans and it subsidises the cost of your studies.
Scroll down to see an example of how interest rates will affect your debt.
Student loans don’t have to be paid back until the April after you’ve left your course and even then only once you’re earning £15,000 or above.
Your loan repayments will be automatically deducted from your earnings the same way as income tax. The amount deducted will be 9% of what you earn above £15,000 (or anything over £1250 per month).
Here’s an example
Andrew borrowed £20,000 as a student. He now earns £1500 in one month. He will pay back £22.50 (which is 9% of £250).
Another month Andrew may earn just £1250. In this case, he won’t make a loan repayment because he is not earning above the threshold.
You may find that the overall amount that you owe goes up. This will happen if total amount you’re repaying does not cover the interest rate rise (or inflation).
Confused?
Here’s an example
Erica borrowed £15,000. If interest rates were set at 0.5%, her debt would rise by £75 per month (because .5% of £15000 is £75). However, because Erica pays off £50 in a single month, her repayment doesn’t cover the full interest rate rise. The result is that her debt increases that month by £25.
Interest rates are pegged to inflation. If inflation is low, so too will be the interest rate on your loan.
This was good news for graduates repaying their loans if inflation is so low that they find they don’t have to pay any interest on their loan.
Here’s an example.
Karina owes £20,000 to the student loans company but she makes no payments because she is earning less than £15,000. Luckily for her, inflation rates hit 0%. This means that her total debt remains at £15,000- still a lot but at least it’s staying put!
Still confused? Post your burning questions about repaying student loans below and perhaps our student finance team can help you out.
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Comments
That is a little idealistic. There are scores of young people who would simply not be able to afford the costs of further education were it not for EMA, in the same way that many people wouldn't be able to afford tuition fees without student loans. Tax rates for those earning over 100K are already coming up to 50% - is this really fair? If you have worked your whole life to become a proffessional in your field and you have to hand over half your money to a government which you don't even feel is representing you then you are not going to be too pleased. Perhaps the government needs to reassess its priorities.
16-03-10
This is one of the elements that puts alot of people off going to university the dreaded 'DEBT'
In my opinion the government should decrease EMA, increase taxes especially to people with an income of over £100,000 per annum, take taxes away from the middle class. thus, allowing the upcoming generations to become more educated. This could then lead to a higher productive output and thus a higher national income of the uk economy.
26-11-09
Any comments?