▌Repayment: Help your students understand interest
Recent research has highlighted that interest is one of the most frequently misunderstood aspects of student loans. Although students may not be thinking about how they’ll repay their student loan right now, it’s really important that they understand how interest is added to their loan, so they don’t get a shock later on when it’s time to repay. We’ve put this article together to help explain the facts surrounding interest.

There are two types of repayment plan – Plan 1 and Plan 2. This article is about Plan 2, which applies to students studying in England and Wales who started their studies on or after 1 September 2012. For information on Plan 1, visit our repayment website at www.studentloanrepayment.co.uk

How much interest is charged?

Interest is charged on the loan from the day we pay the first instalment until the loan is paid off in full or cancelled.

The Government sets the interest rate based on the Retail Price Index (RPI) and updates it once a year in September, using the RPI from March of the same year.

RPI is based on inflation, which measures how prices change over time. So if inflation is 5%, a sandwich that costs £5 this year will be £5.25 next year.

Students will be charged RPI plus up to 3%, depending on their circumstances and income.

While they’re studying, they’ll be charged RPI plus 3%.

Once they’ve left their course, the amount of interest they’ll be charged will depend on their income. If they earn less than £21,000 a year, they will only be charged RPI.

If their annual income is between £21,000 and £41,000, they will be charged on a sliding scale. This will be RPI plus up to 3%, depending on their income. So if RPI is 1.6% for 2016/17, here are some examples of the total interest rates that would apply to a range of incomes:

£21,000	RPI only = 1.6%
£25,000	RPI plus 0.6% = 2.2%
£27,000	RPI plus 0.9% = 2.5%
£31,000	RPI plus 1.5% = 3.1%
£35,000	RPI plus 2.1% = 3.7%
£37,000	RPI plus 2.4% = 4.0%
£41,000	RPI plus 3% = 4.6%

Keeping us up to date

It’s really important that students keep us up to date if any of their personal details change, for example their name or contact details, so that we can contact them with important information about their loan or repayments.

If they don’t respond to our requests for information or evidence, they’ll be charged RPI plus 3%, whatever their income, until we have all the information we need.

Monthly repayments

A key point for students to understand is that while their loans do attract interest, this doesn’t affect their monthly repayments.

Student loans are very different to other forms of debt (e.g. bank loans and credit cards), because repayments are based on their income, not what they borrowed.

Students repay 9% of their income above the repayment threshold, which is currently £21,000 a year, £1,750 a month or £404 a week.

So if they’re paid monthly and earn £2,250 before tax, they would repay £45 a month, which is 9% of the difference between their income and the monthly threshold.

This monthly repayment amount is not affected by the amount of interest that has been added to the loan.

For a range of resources about repayment, including quick guides, factsheets and films, visit our dedicated practitioner website.

Send your students to our repayment quick start guide.

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