Interest on the loan could be the difference between paying everything off before 30 years and having a debt balance at the end of it.
3. How the interest rate works
Interest starts accruing when you first take out the loan, so your debt will accumulate until college.
The interest rate works on a sliding scale. For Plan 2, this ranges from RPI (Retail Price Index), a measure of the rise and fall of prices, to RPI plus 3 percentage points. The RPI is currently 2.6pc, so the maximum interest you would be charged is 5.6pc.
Scale is dictated by earnings. Those earning below the relevant repayment threshold, so £ 26,575 for current graduates, will be charged RPI only. It stops increasing when you start earning more than £ 47,835, in which case it is capped at RPI plus 3 percentage points.
The annual rate is based on the level of RPI in March. This year’s interest rate for student loans, which is between 2.6 and 5.6 percent, is significantly higher than mortgage or savings rates.
On Plan 1 student loans, which are available to students in Scotland and Northern Ireland, you also pay 9pc on anything you earn above the threshold. This is currently £ 19,390 per year before tax.
The interest rate is usually set by the lower of: the RPI rate for March of the same year or the base rate of the Bank of England plus one percentage point. The RPI is currently 2.6 pc and the base rate of the Bank of England is 0.1 pc, so the current interest rate on plan 1 student loans is 1.1 pc.
One quirk to be aware of is that you will be charged the maximum interest rate while you are still studying.
4. Interest rate can matter
A person with £ 60,000 in debt and a low salary is unlikely to repay their loan within 30 years, regardless of the interest rate. For these people, the repayment rate and threshold are the main concerns.
However, this does not apply to everyone. If you are likely to repay your loan within 30 years, the variable interest rate could dramatically increase the repayment period, thereby increasing the total cost of debt.
5. Student debt can have an impact on getting a mortgage
Your student debt won’t affect your credit score, but mortgage lenders should factor your student loan payments into their affordability tests.
This means that student debt could affect your ability to buy a home.
6. You will notice the payments
Student loan payments are taken from your payroll before you receive it, as are income tax and national insurance.
Many think this means they won’t notice the money coming out. However, this will become very clear whenever you receive a raise.