Student loans can be a big concern both for students, their parents and graduates who took out a loan. When statements arrive or if there is news about rises in student loan interest rates it can be a worrying time. There is a big misunderstanding though about the student loan system and it is important that you do not worry unnecessarily about them.

About student loans

A student loan is a sum of money that can be borrowed to study in higher education usually at university. The loan that will be offered will cover the university fees and then the student’s family will be means tested to see how much more money they can borrow. More money is leant to those families that are not so well off, so those that are better off will have to help out their children by giving them extra money so that they have the same as everyone else. The April following graduation is when the first loan repayments have to be made. These only have to be made if the graduate is earning above a certain threshold and they money is taken out through their tax code so the repayments are very different to a loan. In many countries that have a similar scheme they call it a graduate tax scheme rather than a loan which avoids confusion with regards to the repayments. These repayments will whittle down the loan and then after thirty years any remaining loan will be written off by the government. Some graduate, probably about a quarter, will have repaid their loan in full by then. Many will not, partly because they have not got a high income for long enough during the repayment term or because they have taken a break in their working life, perhaps to have a family or travel.

About interest rates

When student loan interest rate rises are announced it is common for people to worry about the increasing cost of their loan. However, because most people do not even repay all of their loan, then this will make no difference at all to them. This is because they will never repay any of the interest and so change sin it will make no difference. Obviously, those graduates that do manage to repay their loans in full will have had to pay more interest. However, if they are completely confident that they will be able to repay the loan in full, then they may benefit from repaying it early. This can be a gamble though as we never know what our salaries might be in the future or if we will have any gaps in our careers.

Repaying the loan

It is also important to realise that even if interest rates go up on student loans, you will not have to repay any more. The interest is not added on to the payments that you make in the way that it is with other loans. With student loan you repay a percentage of your income once your income passes a certain threshold. This will be the same regardless of either the interest rate or how much you owe. The difference it could make is towards the end of the term. If you have not borrowed that much money, then you may end repaying it all and the interest before the thirty years are up. This may also be the case if you are a high earner for a long length of time. However, you will still not be paying any more back each month, it will just mean that you will be starting to pay back the interest rather than just the loan that you borrowed.

It is rather a confusing situation because of the way that it is named and set up and the fact that it is so different to any other. Then, when you get your yearly statement it can look really scary because of the extent of how much you are borrowing. It is best to not really worry very much about it. You will not necessarily need to repay all of it anyway and the interest, which can look the scariest is the bit that you are least likely to have to pay. It is best to really ignore the statement, as the amount you will be paying in your tax code will not be changing and so you will see no difference in your finances as a result.

It is worth noting that if you get a post graduate loan that you will have to repay this alongside your student loan and so your graduate tax will be higher as a result of this. The rules are the same as with a student loan though in the way the repayments work and so you may not have to repay the full loan and your repayments will be set according to your earnings.