Many doctors would have had to use a student loan to study medicine for 5 or 6 years. In this article, we will discuss the terms of your loan, how it’s paid back, and the changes to the student loan that took place in 2012.
To begin, student loans are broken down into 2 domains:
- The tuition fee loan covers the cost of university tuition and gets paid from the student loans company directly to the university establishment.
- The maintenance loan covers your cost of living and is loaned directly to you from the student loan company.
These are combined into one total when it comes to repayment.
As mentioned, in 2012 there was a big change brought about by the then government which overhauled many aspects of the student loan.
If you started your university degree before September 2012, you would have a ‘Plan 1’ loan, even if you continued to receive a student loan in subsequent years after 2012.
If your degree started in or after September 2012, you have a ‘Plan 2’ loan.
The two are similar in concept but differ in a few key factors.
Plan 1 loans
Firstly, you only need to start paying back the loan once you have graduated and have an income of at least £19,390 before tax. This equates to £1,615 per month.
Any income over this threshold will have student loan repayments deducted at a rate of 9%.
Bill earns £30,000 a year after graduating. He goes over the £19,390 threshold by £10,710.
9% of £10,710 gets deducted and goes towards paying off his student loans = £963.90.
So with a salary of £30,000, Bill will pay off £963.90 of his loan in one year.
The interest rates on plan 1 student loans are relatively low. They are currently set at 1.75%. The interest rate can change every year on September 1st but have remained stable for the past 10 years ranging between 0.9% and 1.75% which is very competitive compared to other types of personal loan.
Plan 2 loans
With the introduction of the new plan 2 loan, the threshold at which the student loan starts being paid off is increased from £19,390 to £27,575.
Taking our example from earlier, if Bill was still earning £30,000 per year but instead had a plan 2 loan, only £2,425 of his income would be above the threshold.
9% of this figure would be £218.25, so this would be his annual contribution to his student loan repayments.
Plan 2 loans, however, suffer from higher interest rates which are also more complicated to understand.
During your time studying, the interest rate is calculated by taking the current retail price index (RPI) (which is 3.3% for the current year) and then adding 3% onto that. The RPI represents a measure of inflation for the year as determined by the Office for National Statistics (ONS).
After you graduate the interest rate is based upon your income. If you earn less than £26,575, the interest rate will just be the RPI with no additional 3% figure. If annual earnings are above £47,835 then interest will be RPI + 3% as before. Interest will be scaled linearly between these two figures for anyone who’s annual income is between £26,575 and £47,835.
Plan 2 loan interest rates have typically ranged from 3.9% to 6.6% since 2012. Please visit the gov.uk website to see how interest rates have changed year on year.
Other changes to note
When the new Plan 2 loan was introduced, tuition fees also increased from ~£3,500 annually to £9,000, causing a dramatic increase to students’ debt burden.
Thankfully, student loans do not continue indefinitely – they get written off after a defined length of time. This means that after a certain amount of time, whatever repayment balance you have outstanding is forgiven.
Student loan write-off
If you are on a Plan 1 student loan receiving your first student loan after September 2006, the write off period is 25 years from the April after you graduate.
If you received your first student loan payment before September 2006, it gets written off once you turn 65.
The Plan 2 student loan write-off period is a little more straightforward, as it gets written off 30 years after the April following your graduation.
Both types of loan get written-off if you die or become permanently disabled and unable to work. Further information about student loan write-offs can be found on the student loans company website under the FAQ of the ‘repaying your student loan’ section.
Sometimes it may be beneficial to “run down the clock” with student loan repayments, particularly with a Plan 2 loan (especially if you are going to be a low to mid-range earner or taking breaks in your career).
This is based on the idea that unlike almost all other debt, what you owe is not what you repay. This is discussed extensively on the MoneySavingExpert website, which is well worth the read.
The balance to this strategy would be the extra costs in interest fees, should the debt be repaid in full.
How repayments are made
Repayments of the student loan are taken jointly by HMRC and the student loans company, which are both government-owned. HMRC is responsible for taking the 9% deduction from your salary.
Prior to April 2019, they would then communicate this information to the student loans company on an annual basis, and it would then be treated by the student loans company as if you had made the yearly deductions in 12 equal monthly instalments.
After April 2019 this information is communicated on a weekly basis, meaning that you will be able to get a more up to date loan balance from the student loans website. You will also be less likely to overpay if you are nearing the end of repayment.
Finally, although the student loan repayment threshold is based on your pre-tax income (gross income), the student loan repayments are deducted after income tax (net income).
This does mean that the 9% deductions are slightly smaller given that they are taken after income tax has been deducted, but they cannot be used to help keep you in a lower income tax bracket.
Take home message
I hope that this guide has gone some way to help you understand your student loan.
Although it can seem daunting to owe such a large amount of money even before starting life as a doctor, particularly for those on a Plan 2 loan, in some cases it is worth considering the balance between overpaying your loan, and waiting for the balance to get written off. We will be adding a second part to this article later, discussing this in more detail!
If you have any feedback or questions, do leave a comment or get in touch.