September is the month of back to school. For many young (and even some not-so-young) people, their higher education journey will begin which means becoming acquainted with student loans. Student loans are connected to payroll so here’s a look at what they are and how they can impact take home pay.
What is a student loan?
Put simply, a student loan is money a student borrows to pay for tuition fees and living expenses whilst they are studying. No repayments on the loan are made while the student is still studying and then after graduation, there is a salary threshold below which no repayments need to be made. Student loans are available for undergraduate and postgraduate study and may be supplemented by grants or bursaries which do not have to be repaid.
How much can be borrowed?
The amount that can be borrowed depends on a number of factors including household income but also where the student lives and studies. Tuition fees loans are capped at £9,250 and maintenance loans to cover living expenses go up to £13,022 for those students living away from home and studying in London or £9,978 for those studying outside of London.
The maintenance loan is intended to cover accommodation costs, transport and general living expenses so the maximum loan for those students who stay living at home is reduced to a maximum of £8,400.
The rates are different for part time or continuing full time students.
Any part-time work a student does during their studies has no impact on the amount of student loan that can be borrowed.
Paying back a student loan
No repayments on a student loan are due until after graduation. But then it all becomes quite complicated depending on what plan the loan is under and the income threshold that applies to that plan. For example, students who have borrowed under Plan 4 can earn £27,660 before they need to begin making repayments but those under Plan 5 will need to make repayments when they reach £25,000.
The repayment rate is 9% of income above the threshold. So for example, if a graduate is earning £30,000 and they are on Plan 4, they will need to pay 9% of £2,340 or £210.60.
Interest is charged on the student loan and again, this rate depends on the plan.
Full information on replaying a student loan and all the different plans can be found here.
Repayments are calculated as part of the payroll and are deducted from salary in the same way as tax and national insurance is. When we run payroll, we are notified of the details so we can make the calculation but employees should always check that the amounts are correct. Self-employed people make their repayments via their tax return.
Additional payments can be made at any time to bring down the balanced owed without any penalties.
Under certain circumstances, the loan will be written off. Again, this depends on what plan the loan is under and the details on that can be found here.
The new Plan 5
A new plan has been introduced for this year called Plan 5 so any new students starting this September will be on that plan. The thresholds for Plan 5 are earnings of over £480 a week, £2,083 a month or £25,000 a year before repayments need to be made and the repayment rate is 9%. The interest rate is 7.3%. A Plan 5 loan will be written off 40 years after the April when the first repayment was due.
If you need more information on student loans then head to the Student Finance website https://www.gov.uk/student-finance. If you’d like information on your own payroll scheme that might include employees repaying student loans then just get in touch.