Student loan repayments are made automatically through the tax system. The amount owed will vary based upon your overall yearly earnings and what year you decided to study.
The repayment threshold for student loans taken out after 2012 will increase to £25,000 per annum in April, and will then increase annually in line with changes to average earnings. This change in student loan regulations will affect many people, especially younger adults.
Which student loan category do I fall into?
Student loans are broken down into two categories, plan 1 and plan 2.
If you started university in 2012 or any year after, then your loan will be a “Mortgage Style” loan under Plan 2 and you will need to be earning £25,000 per annum to begin paying the loan back.
Those who started between 1998 when student loans were first introduced and 2012 your loan will be a “Contingent Earnings” loan and falls under Plan 1. Currently, repayments under Plan 1 are made if your annual earnings exceed £17,775. As of April 2019, that figure has now increased to £18,330.
Repayments are at 9% of annual earnings above these thresholds. Therefore, someone earning £26,000 will see their repayments will fall by £360 from £450 to £90 per annum if on Plan 2. Someone earning £18,443 will see their repayments fall by £49.95 from £58.95 to £9 per annum if on Plan 1.
These reductions will similarly apply at higher income levels. Repayment thresholds will change each year in accordance with changes in average earnings. This means that the thresholds could increase or decrease in future years.
How much interest am I paying on my student loan?
Student loan interest rates are based on the rate at which prices rise (RPI). From April 2019 the threshold for your interest rate will be changed, the lower threshold will now be increasing from £21,000 to £25,000 whilst the upper threshold will be increased from £41,000 to £45,000
For those who are on Plan 2 and earn below £25,000, you are charged at the flat RPI rate. If however, you earn above the higher threshold of £45,000 you are charged at the RPI rate plus 3%.
From 1 September 2018 until 31 August 2019, the interest rate set for the existing income Contingent Repayment loans is at 1.5% and will be increasing to 1.75% in September 2019.
What if I have student loans under both plans?
If you find yourself in the situation where you have loans under both Plan 1 and Plan 2, you will be making repayments against your Plan 1 loan from all earnings between the two lower thresholds of £18,443 and £25,000. However, once you have exceeded £25,000 all of your earnings above that level will be offset against your Plan 2 loan.
As the interest on Plan 1 loans is lower than on Plan 2 this does mean that you potentially could end up paying more overall than previously. However, this is not particularly relevant as most people will never actually repay their loans in full.
They could not have made the system more complex if they tried!