Big student loans changes will save grads £100s a year
Brace yourself... Your student loan repayments are set to reduce drastically and could save you hundreds of pounds.
Hundreds of thousands of graduates are set to save £360 a year as changes to student loan repayments come into effect today.
As of the 6th April 2018, the repayment threshold is increasing – meaning many graduates will now be repaying much less than previously, or their repayments will stop altogether.
This is something Save the Student has long been campaigning for, since the government originally decided to freeze the repayment threshold until 2021.
However, their U-turn decision, announced back in October, will not only save you hundreds of pounds a year, but could drastically reduce the amount you repay in total.
So what changes are being made and how could they affect you?
Higher repayment threshold
So the repayment threshold is being increased – but what does that actually mean?
Plan 2 students
Since 2016, graduates only start paying back their student loan the April after they finish uni, and when they’re earning over £21,000 a year.
The new changes mean that they now won’t start making repayments until they’re earning over £25,000 a year.
This is great news for those earning between £21,000 - £25,000 – your repayments will stop completely.
The threshold will now increase every year in line with changes to average earnings - but this also means if average earnings go down, so does the threshold (although this is unlikely to happen).
Plan 1 students
Those on Plan 2 loans will see the biggest change to their repayments, but Plan 1 repayments are set to change too - although this is a change that happens every year regardless.
The repayment threshold for Plan 1 loans changes every year in line with inflation, and is now set to rise from £17,775 to £18,330.
What happens if you’re earning over £25,000?
Credit: Nickelodeon
Even if you’re earning over the repayment threshold of £25,000 you’ll see some major benefits too. In fact, your monthly repayments will drop significantly.
The loan repayment system means that you pay back 9% of what you earn over the repayment threshold.
Previously, if you were earning £26,000, you would pay back 9% of £5,000, as you were earning £5,000 over the threshold of £21,000. This equates to £450 a year.
Now, you only pay back 9% of anything you earn over £25,000.
So, this means if you’re on a salary of £26,000 you’ll now pay back 9% of £1,000 which is £90 a year. That’s a saving of £360 a year!
We've put together a table to show you just what this could mean depending on the salary you earn.
| Salary | Previous annual repayment | New annual repayment |
|---|---|---|
| £20,000 | £0 | £0 |
| £25,000 | £360 | £0 |
| £30,000 | £810 | £450 |
| £35,000 | £1,260 | £900 |
| £40,000 | £1,710 | £1,350 |
As you can see, all graduates earning £25,000 and over are set to save £360 a year - that's the price of a decent holiday!
Interest rates are changing too
Credit: Cravendale
Ok, we’re heading into some pretty dense territory here, but bear with us.
As you may or may not know, while you're studying, the interest on your loan is worked out as RPI+3% (currently 6.1%).
But when your repayments are due to start, the April after you graduate, the interest changes slightly to RPI+ UP TO 3%.
The 'up to' part is worked out and rises gradually depending on your earnings.
Before today's change, the sliding scale was worked out on your earnings between £21,000 and £41,000.
- If you earned £21k or less, it was just RPI.
- If you earned over £21k, it was RPI plus a percentage up to 3%. This added percentage starts low and rises in line with whatever you’re earning.
- It stopped increasing when you started earning £41k+, at which point it capped at 3%.
As an example, if you earned £31,000 (halfway between £21k and £41k) the interest applied to your loan that year would be RPI + 1.5% (1.5% being half of 3%).
Following today's change, the interest will be calculated using earnings between £25,000 to £45,000 instead.
Using the example of £31,000 again, your interest will now only be RPI + 1% instead of RPI + 1.5%.
This table shows how your loan interest rate is changing depending on the salary you earn
| Salary | Previous interest rate | New interest rate |
|---|---|---|
| £21,000 | 3.1% | 3.1% |
| £25,000 | 3.7% | 3.1% |
| £31,000 | 4.6% | 4% |
| £41,000 | 6.1% | 5.5% |
| £45,000+ | 6.1% | 6.1% |
While it's great that interest rates are reducing for most graduates, it actually might not make much difference in the long run...
Will this affect your total amount of student debt?
The great news is that for the vast majority of students, yes! This threshold increase means that many students will end up paying back a lot less in total before their debt is wiped off after 30 years.
Unlike normal loans, where the longer you take to pay them off means the more you end up paying in the long run, the 30 year cut off point means you should try and hold on to as much money as you can.
This is fantastic news for students and graduates, and it's something we campaigned for heavily so I'm happy it's finally happening.
The best news is that this decrease in repayments will just add to an already large pile of debt that most graduates will never end up paying back, when their loans are wiped 30 years after graduation.
In fact, some quick calculations using our student loan repayment calculator show that the threshold increase will mean around 85% of grads won't pay back their whole loan before it's wiped, an increase of 10+ percentage points from before this change.
Now I just hope that the government will take a look at the paltry maintenance loans and the way in which they're calculated!
Jake Butler, Save the Student's Student Finance Expert
There are loads of tuition fee myths which simply aren't true, so make sure you're clued up.
Do you need to do anything?
Nope, the best part about student loan repayments is that they get deducted from your salary automatically without you having to do anything.
The changes will come into effect when you receive your next payslip - you should see your monthly payments reduce or stop altogether.
But make sure you check! The Student Loans Company have been guilty of overcharging students, or taking repayments too early, and if they do, you could be due a refund.
If you're hungry for more, our Big Fat Guide to Student Finance contains everything you need to know about your student loan - minus the jargon.
What are you going to spend that extra £360 a year on? Let us know in the comments.
