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Managing Student Loans

by - Sunday, January 26, 2014

The virtues of higher education are preached to many of us from the time we’re very young, but few academicians wax poetic about student loans. And little wonder, as student loans in the UK can be confusing and problematic, particularly since different rules apply to different groups of students, depending upon when they began studying for their degrees.

Granted, the situation in the UK hasn’t reached the crisis point of the student loan problem in the US, where an entire generation has been cast into dire circumstances because of burdensome student loan debt, with the added insult of a very sluggish job market. But the UK situation is not without its hassles and confusion.

Many UK university graduates begin their working life with thousands of pounds in student loan debt, and in light of the fiercely controversial tuition increases in recent years, the situation is not expected to get better any time soon. Student loan is not classified as consumer debt, and it will not affect your credit rating. But it’s still a debt, and sooner or later it is going to have to be paid off. However, paying it off sooner rather than later may not be your best bet. It all depends upon when you got your loan.

Before 1998

If you began studying before 1998, the loans have much higher interest rates than those issued between 1998 and 2011. Hopefully you’ve long since paid off that loan, but if you haven’t, it is definitely to your advantage to pay it off as soon as possible. Research your options in order to determine what is best for your individual situation.

Between 1998 and 2011

Ah, this was the golden era of student loans – relatively speaking. Normal loans have an interest rate of 8% to 12%, but a student loan's interest rate for this period was set at either the Bank of England's base rate plus 1%, or the rate of inflation – whichever is lower. Students who began their studies between 1998 and 2011 are required to repay nine percent of their income over £15,000 – a requirement that began or will begin on the 6th April after graduation. You stop making payments if your wage falls below £15000 a year, and your debt is wiped out after 25 years or if you die. If you are an employee, payments are automatically deducted from your wages and the deduction will show up on your pay slip. Those who are self-employed will have to do their own calculations, based on their income and National Insurance payments.

While it may seem prudent to pay this loan off early, just to get it out of the way, you’re actually better off paying down your higher-interest loans, such as bank loans, car payments, credit cards, and mortgages. You’ll save yourself a lot of money in the long run. In particular, if you’re thinking of buying a house in the near future, you’re best advised to save your money to make as large a down payment as possible, in order to save yourself paying a lot of interest down the road. You can also gain more interest in savings or investments than the interest you’re paying on your 1998-2011 student loan.

2012 and beyond

Despite the dire predictions by the legions of believers in the Mayan calendar, the world did not end in 2012. But an era of cheap student loans did end. In light of recent hikes in tuition fees to as much as £9,000-a-year, the rules for loans issued in 2012 and later are different yet again. One important point is that you don’t have to pay back anything until you are earning over £21,000 (once you’ve graduated). Even then you’re still only required to pay back nine percent of anything above that amount, no matter how much you owe. And if you’re worried about being in debt for the rest of your life, there is a cutoff point of 30 years, after which the remaining debt will be wiped clean. Granted, 30 years may seem like an eternity when you’re young, but with people living longer and longer lives, it’s really not that long.

Of course, laws and regulations are always subject to change, and it’s wise to check the government’s information page for updates: https://www.gov.uk/student-finance/repayments

The important thing is not to let confusion about student loans keep you from pursuing your education – and your dreams.

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