The recent hike in tuition fees has meant that students from 2012 will amass the greatest student debts ever seen in the UK. This can be scary, but only when you don’t know the facts.
The most important thing to realise is that you don’t repay any of your loans (tuition fee loans or maintenance loans) while you are still studying. That all happens much later, once you have graduated and have started work.
Once you have started work, but probably not straight away. The rules for student loan repayment state that the threshold salary is £21,000 per year. That means that if you earn £21,000 before tax, or less, you will pay nothing back.
When your salary goes above £21,000 per year, you then pay 9% of everything above that. The size of your repayments is always dependent on your earnings, not on the size of your outstanding loans.
If you land a job paying £35,000 per year after graduation (lucky you!) you would end up paying back £105 each month out of a monthly salary of £2,916 before tax.
If you are employed by an organisation in the UK, your employer will deduct your payments from your salary, so you never see that money. What you never have, you never miss and the only evidence will be the printout on your payslip.
Your employer will send a report of the accumulated payments to HM Revenue and Customs – HMRC and they will send you a statement showing how much of your student loan you have repaid that year.
If you start your own business after graduating, either setting up a Ltd company or acting as a sole trader, you don’t technically have an employer. You will have to fill in a tax return though and you will declare on this that you have student loans to repay. HMRC receives your tax return and, if your earnings from the business top £21,000, you will then pay 9% of the excess. The money is added to your annual tax bill, which is paid twice a year, in January and July.
HMRC will send you a statement each year, so that you can see what you have paid off and what proportion of your student loan is still outstanding.
Your debt is not cancelled and you need to pay back at the same sort of rate. For many countries, the threshold is the same, but for some it is different (it can be lower or higher). You will need to fill in an Overseas Income Assessment Form and send this to the Student Loans Company, who will work out your payments.
All student loans are cancelled after 30 years, even if there is still an outstanding balance. Some people will never pay off their full loan, which is why it makes no sense to try to pay back more than you need to earlier.
If you are lucky and work in highly paid jobs, you may end up paying the entire loan off. As your loan diminishes and statements are only prepared once a year, you will be given to option of switching from having your repayments taken from your salary to paying by direct debit. This will give you monthly control of your student loan repayments so you don’t overpay at the end.