How Do Student Loans Work?

If you’re planning on going to university, then you’ll need to familiarise yourself with the ins and outs of student loans. From the amount you’ll pay for tuition to what finance you’re eligible to receive, the more research you do before applying, the better.

Luckily, we’ve got things covered with this guide to student loans. We’ll take a look at the student loan process, including what you’ll receive and how you pay it back after you graduate.

Quick navigation

• What do student loans cover and what can I get?
• How to apply for student finance
• How much of my student loan do I have to pay back?
• How do you pay a student loan back?
• Will I pay interest on my student loan?
• Can I pay my loan back early? Is it worth doing this?

What do student loans cover and what can I get?

Students going to university apply for a tuition fee loan and maintenance loan, which they’re eligible for provided they meet the following conditions:

• They’re a UK national and have been living in the UK, Channel Islands or Isle of Man for the three years before their course start date.
• They’re applying to a recognised university or college degree course.
• It’s their first Higher Education course. Normally, they can apply for a loan to cover tuition fees for the duration of their first undergraduate degree course, plus one year (in the instance that they drop out and return to study).

When your application is successful, you’ll be entitled to a tuition fee loan and maintenance loan.

• Tuition fee loan: This is the money that goes straight to the university. Students don’t see this money, so really, there’s very little to fret over in all honesty. Upon graduation, you’ll start paying this back once you’re earning over a certain amount.
• Maintenance loan: This part of your student loan covers the cost of your accommodation, utility bills, course materials and other living costs. As with your tuition loan, this only gets paid back once you’re earning above a certain amount after you graduate.

The amount you’ll get depends on where you’re studying, your family’s income and whether you’ll be living away from home. For the 2019/20 academic year, the highest students studying outside of London could receive was £8,944, while students studying in the capital received £11,672.

Note: The maintenance loan replaced the maintenance grant in 2016.

How do I apply for student finance?

You can apply for both loans through the Student Finance England website. The recommended application deadline is the end of May to get your student finance by the start of the university term. While you can still apply after this date, there’s no guarantee that you’ll receive the funds in time for September.

Additionally, you can apply for student finance up to nine months after the beginning of your course. However, you’ll have to cover your fees and costs in the meantime.

How much of my student loan do I have to pay back?

The amount you pay back after graduating depends on how much money you earn once you’re in stable employment. Repayments don’t begin until you start earning more than £25,725 a year. For every pound you earn over this amount, nine pence of that is automatically paid off your loan. Thus, the more you earn, the more you pay. You don’t have to pay back any amount given to you as a grant or bursary.

To work out the exact amount of how much you’ll pay back monthly, do the following:

• Take your annual salary before tax
• Take away the repayment threshold from that
• Calculate 9% of the resulting amount
• Divide that number by 12

How do you pay a student loan back?

Unless you’re self-employed, the Student Loans Company tracks your earnings and alerts your employer once you’re eligible to start paying. Your job then takes away the correct amount and pays it on your behalf. So, you don’t have to do anything. If you’re self-employed, however, you’ll have to work out and pay the right amount yourself.

Will I pay interest on my student loan?

From the moment the money you borrow lands in your account, you start paying interest. The more you earn, the more interest is added to your loan. While you’re at uni or earning less than £25,725, the interest you pay is the same as that of the Retail Price Index (the measure of inflation).

The rate gradually increases as you earn more. So, for every £1,000 you earn over £25,725, the rate goes up by 0.15%. Once a graduate earns more than £41,000, the rate is set at the Retail Price Index plus 3%, which is the maximum rate. The interest continues to be added to whatever amount still needs repaying.

Can I pay my loan back early? Is it worth doing this? 

If you’re fortunate enough to pay your loan off later down the line in one go, then by all means, you can. However, experts recommend not doing so. If you’re only earning a low wage, the amount of interest you pay on a student loan is often less than the amount of interested gained from putting your money in a savings account. Rather than pay it off, it’s probably better to put that money in an ISA.

Additionally, if you’re earning in the £30-40K range, you might be thinking about mortgages or buying a car. If you’ve paid off your student loan, then you might have to get another loan. And since commercial loans come with much higher interest rates compared to student loans, it will only end up costing you more in the long run.

If you’re looking for a student living experience that offers more, head over to the NIDO STUDENT SITE to see what properties are nearby or drop us a line on 0207 1000 100 for more information on our student residences.