The curiosity charged on the loan may make the distinction between paying all of it off earlier than 30 years, and having a debt steadiness left on the finish.
3. How the rate of interest works
Interest begins accumulating while you first take out the loan, so your debt builds up by means of college.
The rate of interest works on a sliding scale. For Plan 2 it ranges from the RPI (retail worth index), a measure of by how a lot costs rise and fall, to RPI plus 3 proportion factors. RPI is at the moment 2.6pc, so the utmost curiosity you’d be charged is 5.6pc.
The scale is dictated by earnings. Those incomes below the related reimbursement earnings threshold, so £26,575 for present graduates, will probably be charged RPI solely. It stops rising while you begin incomes greater than £47,835, at which level it is capped at RPI plus 3 proportion factors.
The fee annually relies on the extent of RPI in March. This 12 months’s rate of interest for student loans, which is between 2.6pc to five.6pc, is considerably larger than mortgage or financial savings charges.
On Plan 1 student loans, which students in Scotland and Northern Ireland have, you additionally pay 9pc on no matter you earn over the brink. This is at the moment £19,390 a 12 months earlier than tax.
The rate of interest is often set by whichever of the next is lowest: the RPI fee from March of the identical 12 months or the Bank of England base fee plus one proportion level. RPI is at the moment 2.6pc and the Bank of England base fee is 0.1pc so the present rate of interest on Plan 1 student loans is 1.1pc.
One quirk to concentrate on is that you may be charged the utmost rate of interest while you’re nonetheless learning.
4. The rate of interest can matter
Someone with £60,000 of debt and a low wage is unlikely to pay again their loan inside 30 years, whatever the rate of interest. For these folks, the reimbursement fee and threshold are the details of concern.
However, that doesn’t apply to everybody. If you might be prone to pay again your loan inside 30 years, the variable rate of interest may considerably enhance the size of time it takes to pay it off, rising the whole price of the debt.
5. Student debt can impression getting a mortgage
Your student debt received’t have an effect on your credit rating, however mortgage lenders must take your student loan funds under consideration of their affordability testing.
That means a student debt may negatively have an effect on your capacity to purchase a home.
6. You will discover the funds
Student loan funds are taken out of your pay earlier than you obtain it, identical to revenue tax and National Insurance are.
Many imagine that this implies they received’t discover the money going out. However, it’s going to turn into very clear any time you obtain a pay rise.