Student Loans Prices vs Costs – A Case Study

We have all seen the horror stories regarding Interest Rates applicable to Student Loans at a time when Base Rates are historically low but what do you have to pay back and is that related to the price of the Student Loans themselves?

In March 2020, the Department of Education  established new repayment thresholds for Student Loan Plans 1 and 2 which would come into force from April 2020. The Student Loan Plan 1 repayment threshold was increased from £18,395 to £19,390. The Student Loan Plan 2 repayment threshold was increased from £25,725 to £26,575. Where graduate earnings are in excess of these thresholds repayments will still be calculated at 9%: importantly, this is a completely different figure from the amount of debt a graduate has and the interest applied on that sum.

A Case Study

So how much will I have to repay?

Let’s take the example of Mr. B

Mr. B is a Plan 2 graduate and earns £40,000 a year which is £13,425 more than the current Student Loan Plan 2 repayment threshold. So, over the next year, Mr. B will repay 9% of £13,425 which amounts to £1208.25 a year and circa £100.68 per month.

Mr. C meanwhile  is a Plan 2 graduate and earns £25,000. As this is less than the current Student Loan Plan 2 repayment threshold he will pay nothing next year.

So does this mean it is not worth challenging my Student Loans?

No. 

While Mr. C is under the repayment threshold now, it is unlikely he will be forever. Even while he is under the repayment threshold the debt will still be owed and interest will continue to accrue at the rate of RPI- it is not to be forgotten either that while studying until the April following his graduation he was charged RPI plus 3% on the debt. 

When Mr. C does reach the threshold is he not entitled to begin repaying a fair amount of debt based on a fair amount of interest? An amount of interest we would say to be a fixed rate of interest to be applied only after he had finished studying rather than a higher variable rate applied from the moment he began his studies?

Mr C’s debt will be written off 30 years from the April he was first due to repay but it will remain a liability until that point. 

It will not appear on Mr. C’s credit file or affect his credit score but some mortgage lenders and credit providers may ask to know about the level of student loan debt as part of an affordability check. It will benefit Mr C if he could report a lower level of debt equating to a fair amount of interest. It would also ease the burden on other graduates repaying Student Loans and the public purse if Mr C paid back more of what he fairly owes, and perhaps prevent more Student Loan books being sold off to the private sector.

Get in touch today to discuss Student Loans.

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