How Student Loans Work in the UK

UK student loans are fundamentally different from other types of borrowing. They function more like a graduate tax than a traditional loan, with repayments contingent on income and automatic write-off after a set period.

This guide explains how all aspects of UK student loans work, including the different plan types, repayment mechanisms, interest calculations, and long-term implications for graduates.

There are currently five main student loan plans in the UK, determined by when and where you studied:

You can have multiple loan plans if you've studied different courses. For example, you might have a Plan 2 undergraduate loan and a Postgraduate loan.

The Repayment Process

Unlike conventional loans, student loan repayments are:

• Income-contingent: You only make repayments when your income exceeds the threshold for your plan type
• Automatically deducted: Repayments are taken directly from your salary through PAYE, like income tax
• Based on earnings, not borrowing: How much you repay depends on your income, not how much you borrowed
• Time-limited: Any remaining balance is written off after a specified period, regardless of how much you've repaid

Calculating Your Repayments

For all plan types, repayments are calculated as 9% of your income above the threshold. If you have a postgraduate loan as well, you'll pay an additional 6% on income above the postgraduate threshold.

When Repayments Start

Repayments begin from the April after you graduate or leave your course, but only if your income is above the threshold. If your income drops below the threshold at any point, repayments automatically stop.

If You Have Multiple Loan Plans

If you have loans under different plans (e.g., Plan 2 and Postgraduate), you'll make repayments for each loan when your income exceeds their respective thresholds:

Interest rates vary significantly between different plan types and can also vary based on your circumstances and income. Most plans use the Retail Price Index (RPI) as a base for interest calculations.

Plan 1 Interest Rates

Plan 1 has the simplest interest rate structure: the lower of either the RPI rate or the Bank of England base rate plus 1%. This is currently one of the lowest interest rates among all plan types.

Plan 2 Interest Rates

Plan 2 has a variable interest rate that depends on your income:

• While studying and until the April after graduation: RPI + 3%
• After graduation, earning under £27,295: RPI only
• Earning between £27,295 and £49,130: Interest increases gradually from RPI to RPI + 3%
• Earning over £49,130: RPI + 3%

Plan 5 Interest Rates

Plan 5 has a simplified interest rate structure compared to Plan 2:

• While studying and after graduation: RPI only (no added percentage)

This lower interest rate is one of the benefits of Plan 5 compared to Plan 2, particularly for higher earners who might accumulate significant interest under Plan 2.

Postgraduate Loan Interest

Postgraduate loans have a fixed interest rate of RPI + 3%, regardless of income or whether you're studying or have graduated.

Should You Pay Your Loan Off Early?

You can make voluntary extra payments to your student loan at any time. However, for many graduates, this may not be financially beneficial:

• If you're unlikely to pay off your loan before it's written off, making extra payments effectively means paying money you wouldn't otherwise have had to pay
• The money might provide better returns if invested elsewhere or used to pay down higher-interest debts
• Unlike other loans, student loans don't affect your credit score and don't impact mortgage applications in the same way as other debts

Generally, early repayment makes the most sense for high earners with Plan 2 loans who are certain to pay off their loan before the 30-year write-off period.

Loan Write-Off Periods

All UK student loans are automatically written off after a set period, even if you haven't repaid a penny:

• Plan 1: 25 years after repayments became due
• Plan 2: 30 years after repayments became due
• Plan 4: 30 years after repayments became due
• Plan 5: 40 years after repayments became due
• Postgraduate: 30 years after repayments became due

Loans are also written off if you become permanently disabled or pass away.

Moving Abroad

If you move overseas, you'll still need to repay your student loan. The repayment threshold will be adjusted based on the cost of living in your new country of residence. You'll need to:

1. Inform the Student Loans Company (SLC) that you're moving abroad
2. Complete an Overseas Income Assessment Form
3. Provide evidence of your income or means of support

Self-Employment & Freelancing

If you're self-employed or have freelance income, you'll make student loan repayments through your Self Assessment tax return. The same threshold and percentage apply as for employed graduates.

Maternity Leave & Career Breaks

During maternity leave or career breaks, repayments automatically stop if your income drops below the threshold. There are no penalties for this, and interest will continue to accrue at the rate determined by your circumstances.