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The cost of living crisis, private renting and frozen income thresholds mean young people face a significant financial burden.
Add to that student loan payments, and graduates face what is essentially an additional 9 percent tax on their income, which could stay with them for decades.
Many graduates regret checking their balance only to see that it has increased by thousands of pounds and that their payments don’t even make a dent in the interest accrued.
Payback time: Graduates begin repaying their loan at different thresholds depending on when they started college.
This is especially true for taxpayers who went to university after 2012, when fees tripled to £9,000 per academic year.
Some have suggested raising the threshold at which graduates begin repaying their student loans or reducing the interest rates added to the loan.
But there doesn’t seem to be much political desire to change the current student loan system, meaning many taxpayers face an additional tax over the course of their working lives.
We looked at how much you could expect to pay per month, depending on when you started college and how long it will take to pay off the debt.
When do students start paying off their loans?
Unlike a standard loan, the system acts more like a tax on graduates and increases the more you earn. What and how to pay it depends on which of the five different payment plans you are on.
Those who started university before September 1, 2012 will be in Plan 1 and will start repaying their loan once they earn more than £22,015 a year.
Those in Plan 2, who went to university between September 1, 2012 and July 31, 2023, will start repaying their loan once their income exceeds £27,295, and those who started after September 1, 2023 are on Plan 5 and will start paying when you earn more than £25,000.
In Scotland, students are on Plan 4 and will start repaying the loan once they earn more than £27,660 a year.
All graduates, regardless of what scheme they are on, pay 9 per cent of their income above the threshold, while postgraduate loans pay 6 per cent.
For basic rate taxpayers, it means a marginal tax rate of 39 percent.
The level of interest applied to the loan has been a controversial issue, with many graduates not even making a dent in the interest accrued each month.
Typically, the interest charged has been based on the retail price index (RPI) inflation rate rather than the more commonly used consumer price index (CPI).
When the RPI jumped to 13.5 per cent in March 2023, the Government introduced a 7.6 per cent cap on all loans.
The current level of interest in each plan is:
- 7.6% on postgraduate loan scheme
What do you have to return per month?
When the Government changed the rules on loan repayments with the introduction of Scheme 2, it also increased the threshold at which graduates repay them.
Proponents of the plan said it meant people would only pay when they earned a comfortable wage.
However, this remains frozen at £27,295 a year, meaning that if wages grow in line with inflation, more people will pay back their loan.
Government student loan figures suggest the average expected debt among the group of borrowers who started their course in 2022/23 is £45,600, when they complete their course.
An analysis of payments based on average debt, paying 9 percent on everything earned above the threshold and assuming RPI + 3 percent interest and salary growth of 4 percent annually, shows how much graduates will pay for month.
Those earning more than £30,000 will pay £244.08, or £20.34 a month. This rises to £95.34 a week, or £1,144.45 a year, for those on £40,000 a year, according to analysis by wealth management firm Quilter.
This almost doubles to £170.34 for those earning £50,000 a year. Six-figure earners will pay £545.34, or £6,544.08 a year, rising to £920.34 a week, or £11,044.08 a year, for those on £150,000.
Monthly payments are even higher for lower earners on Plan 5: those earning £30,000 pay £37.53 a month and £112.53 for those earning £40,000.
However, people with higher incomes will not pay much more than those in Plan 2.
Graduates on £75,000 will pay £375.03 a month, compared to £357.84 for those on Plan 2, while those earning £100,000 will pay £562.53 a month compared to £545.34 on Plan 2.
> We explain if it is worth saving to pay off your loan early
How long will it take to pay off your student loan?
The prospect of paying what could be hundreds of pounds a month for decades on student loans is not a pleasant one.
So how long would it take you to pay off the mountain of debt?
Those on Plan 2 have their loans written off after 30 years, and Quilter’s analysis shows that graduates earning £30,000 and £40,000 are unlikely to repay the full loan amount.
Similarly, graduates earning the same salaries in Plan 5, which phase out after 40 years, will spend most of their working lives repaying their loan.
Those earning £50,000 will spend 26 years on Plan 2 and 25 years on Plan 5 to repay their loan, which is drastically reduced to 12 and 11 years for those earning £75,000.
Although unlikely, those who earn £150,000 straight out of university will spend just 4.5 years of their working life paying off their student debt under both Plan 2 and Plan 5.
Of course, if you earn more or your circumstances change, this could reduce or extend the overall time period, but it provides a good snapshot of the overall pay period for each salary.
Because it is based on the amount you earn, it will take longer to pay off the loan as more interest accrues over time.
Tom Allingham, spokesperson for Save the Student, said: ‘According to our latest National Student Money Survey, 67 per cent of respondents worry about having to repay their student loan.
‘This figure is up from the previous year, which correlates with the introduction of the Plan 5 regressive payment scheme which benefits higher-earning graduates and increases lifetime payments for their low- and middle-income peers.
‘But as daunting as some of the repayment figures may seem, it’s worth remembering that they should still be quite manageable, the debt will eventually be written off and none of it will have any impact on your credit score.
“However, these changes are regressive and we encourage the Government to reconsider how the new plan disproportionately and negatively impacts low- and middle-income graduates.”
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