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How student loan interest is calculated for Plan 2: Annual income can impact interest rate

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Tuition fees for higher education and the living costs for during this period of studying are no doubt substantial. For many, the way in which they are able to afford to study at university or college is via student finance.

Via this route, people may be able to borrow money to help to pay for their course fees, as well as get help with living costs.

These loans are split into two categories – the Tuition Fee Loan and the Maintenance Loan for living costs.

People who are on a low income, are disabled or have children may also be able to get extra money on top of this.

While some forms of extra support such as grants won’t need to be paid back, student loans will need to be repaid.

However, this only begins to be repaid once a person earns over a certain amount.

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“The size of your monthly repayments will depend on how much you earn, not what you owe,” the Government website explains.

Interest on the loan begins to be charged form the day it is taken out, meaning many will understandably want to know how student loan interest is calculated.

It’s important to note the terms and conditions can change, and the rules are different if a person’s course started before September 2012.

There are two different plans – Plan 1 and Plan 2 – with the one a person finds themselves on depending on certain factors.

Those who got their loan, from England or Wales, in or after September 2012, would be on Plan 2, and anyone before this would repay via Plan 1.

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People who got their loan from Scotland or Northern Ireland, meanwhile, would make repayments under Plan 1, as the Money Advice Service explains.

How much a person repays and the interest charged depends on the plan they are on.

As such, this guide will specifically focus on Plan 2.

To begin paying back money for the loan, a person’s income must exceed a threshold for their weekly or monthly income.

For Plan 2, the borrower would then repay nine percent of the amount they earn over the threshold for Plan 2.

At this moment in time, the repayment thresholds for Plan 2 are: £26,575 a year, £2,214 a month or £511 a week.

The Government assures: “You do not pay anything back if your income is under the threshold.

“Interest starts being added to your loan from when you get your first payment.”

While a person is studying, interest on Plan 2 is charged at 5.6 percent.

This is made up of the Retail Price Index (RPI) – which is currently set at 2.6 percent – plus three percent.

It applies until the April 5 after the student finishes or leaves their course, or for the first four years of their course if they’re studying part-time, unless the RPI changes.

After that, the interest rate will depend on the person’s income in the current tax year.

Currently, the interest rates for people on Plan 2 are as follows:

  • Annual income – Interest rate
  • £26,575 or less – RPI (currently 2.6 percent)
  • £26,576 to £47,835 – RPI (currently 2.6 percent), plus up to three percent
  • Over £47,835 – RPI (currently 2.6 percent), plus three percent.



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