Student loans can be a source of stress for many students and graduates. When their statement comes it can be source of horror when they see how much they owe and when news of interest rates increasing comes out then this can further this stress. However, it is very wise to ask yourself whether you should worry about what you owe and what the interest rates are.
- What difference will interest rates make? – it is worth understanding more about how student loans work and whether the interest rate changes and in fact the statements should be a source of worry to you. The loans work very differently to other sorts of loans and it has in fact been argued, that they should not even be called loans because of the way they work. A graduate will not have to make any repayments until the April after they have left university. They then have a period of 30 years where they may have to make repayments after which any remaining loan will be written off. This means they potentially not repay any of the loan, although most graduates will repay some and very few will repay all of what they owe. The repayments are calculated based on what the graduate can afford and are taken out of their salary using a special tax code. This means that until they are earning over a certain amount of money, they will not be asked to repay anything. Then there is a increasing scale, where repayments will increase as salary increases up to a maximum cap. This means that graduates who are out of work or on a low salary will not have to make any repayments at all, those on a reasonable salary will start to make repayments and those on high salaries will repay the maximum each month. The amount paid is adjusted depending on pay so even if you are paying the maximum at one stage, if you are then out of work you will not have to repay any until you are earning above the threshold again. What this means is that you should always be able to afford the repayments.
Interest rates are charged on the outstanding balance and so if you are paying off a lot, then there will less outstanding to pay interest on. If you are not are paying any then there will more outstanding to pay interest on and therefore those with more money outstanding will be charged more interest. However, the interest is added on to what is owed, rather than charged to the graduate. This means that if they do not manage to repay the full amount, which is what happens with three quarters of graduates, they will never repay any interest.
- Will I
even pay interest?
So whether you pay interest will very much depend on how much you earn. You will have to be earning a lot of money consistently for thirty years in order that you will repay all of the interest. Whether you do this will depend on a lot of factors. The career that you go into may be one that is highly paid and therefore your starting salary could be already on the threshold for repaying the loan and if this continues then you maty repay some or all of the interest. However, if your salary starts low and climbs slowly then you may not pay any interest. This may also be the case if you take some time out of work. This might be to travel, have a family, look after older family members or because you are out of work. If you are not working and therefore not earning, you will not have to make repayments for this period. So, whether you personally pay interest will depend on how your career pans out, but looking at the current figures, odds are that you will not have to pay any interest.
- Will I
end up repaying more each month if rates go up?
It can be a worry that when we see the stories about rates going up, that we will have to start paying more back each month on the loans. It is worth understanding how the rates work before you start to worry.
Firstly, the interest rate is determined by
your earnings. If you earn below the threshold they are set at the RPI, which
is the Retail Price Index and so any rise in rates announced by the government
will have impact at all. Once you are earning at a higher rate then the interest
rate is the RPI and a percentage and in between the two figures you are charged
somewhere in between the two – it is set on a sliding scale, rising slowly as
salary rises. The actual percentage the thresholds do change so you will need
to check these. The first thing to realise is that an RPI increase should not
cost you anything extra because your salary should go up by this much as well.
The interest going up should also not really concern you for another reason. It will not change how much you repay. The amount you repay is 9% of what you earn once you earn above a certain threshold which is the same threshold as when you will start being charged interest on the loan. So, as it is a percentage of what you earn, then the interest charged will make no difference at all to what you are repaying each month.
- Will I
even pay any interest at all?
This will very much depend on whether you manage to earn enough to make significant repayments on the loan. You will need to consistently earn a large salary in order to make large enough repayments to clear your loan and the interest. So, if you take time out of work, are on a low salary or borrow a lot then you are less likely to repay it. If you borrow less money, perhaps only for fees rather than fees and loving expenses, perhaps if you stay at home, then you are more likely to have to pay the interest as it will be easier for you to be able to afford to repay all of the loan before the thirty years are up.