Understanding How Student Loans Work. And Why They’re Not Like Normal Debt
When it comes to debt, UK student loans are one of the most misunderstood financial topics.
Some people view them as a burden. Others consider them “good debt.”
Many experts now describe them as a form of graduate tax rather than a traditional loan.
So let’s break down how student loans really work, why they’re different, and what students and parents should understand before making decisions.
Why Many People Call It “A Type of Tax”
You’ll often hear, “Student loans are basically a tax on graduates.”
And honestly, that’s not far from the truth.
Here’s why UK student loans don’t behave like normal debt:
Repayments depend on your income, not how much you borrowed
You only repay once you earn above a set threshold
You pay 9% of what you earn above the threshold
If your earnings drop, repayments stop automatically
The loan is written off after 25–40 years, depending on your plan
Most graduates never repay the full balance before it’s wiped
So for many people, the student loan works more like a graduate contribution system.
You pay more when you earn more and nothing when you earn less.
It’s not a moral failing or a sign of poor financial choices.
It’s simply how the UK funds higher education.
How UK Student Loans Actually Work
When you go to university, your student loan is split into two parts:
1. Tuition Fee Loan
Paid directly to your university to cover your course fees.
2. Maintenance Loan
Paid into your bank account to help with living costs such as rent, food, and books.
Both parts are then combined into one balance.
Interest is added from the day you take the loan out.
When do repayments start?
You start repaying only when:
You’ve finished (or left) your course and
You earn above the repayment threshold for your plan
Repayments are taken automatically through your payslip via PAYE.
Example (Plan 2):
Threshold: £27,295
Your income: £32,295
Amount above threshold: £5,000
Repayment: 9% of £5,000 = £450 per year (around £37.50 per month)
You never choose the payment amount. It’s calculated automatically.
When Do You Start Paying It Back?
Your Plan Type Matters
There are several student loan “plans.” Each has different rules for repayment thresholds and write-off periods.
Plan 1
For pre-2012 students
Repayment threshold: ~£24,990
Wiped after 25 years
Plan 2
For English & Welsh students (2012–2023)
Repayment threshold: ~£27,295
Wiped after 30 years
Plan 4 (Scotland)
For Scottish students
Repayment threshold: ~£31,395
Wiped after 30 years
Plan 5 (New from 2023)
For new English students
Repayment threshold: ~£25,000
Wiped after 40 years
Government rules change regularly, so it’s always worth checking the latest figures on the official Student Loans Company GOV.UK website.
Students & Parents: What You Should Consider Before Borrowing
Before applying for a student loan, it’s worth understanding:
How much will be borrowed (tuition + maintenance)
Likely future earnings in your chosen field
How the repayment plan works
When the loan gets written off
The difference between interest rates and repayment thresholds
For many graduates, the size of the loan matters less than their future earnings.
If someone never earns above the threshold, they may never repay the full amount before it’s written off.
The MoneyHelper Student Loan Guide is a great place to start for clear, unbiased information.
Should You Ever Overpay a Student Loan?
This is the big question, and the answer varies depending on your circumstances.
it’s important to understand the student loan
Reasons some people avoid overpaying:
Your repayment amount stays the same, it’s based on income, not balance
Many graduates won’t repay the full amount before it’s wiped anyway
Extra payments could be invested elsewhere for potentially higher returns
Paying early may not improve your financial position
Reasons some high earners consider overpaying:
If you expect to fully repay your loan before it’s written off
If your income is consistently high
To reduce long-term interest costs
There’s no one-size-fits-all answer.
The key is understanding your plan type and running the numbers for your own income expectations.
The Most Important Thing: Understand Your Loan
The student loan system isn’t perfect and it can feel confusing.
But it’s not something to fear.
For most people, the UK student loan behaves more like a graduate contribution than traditional debt.
Once you understand:
What plan you’re on
How repayments work
When the balance gets wiped
…it becomes much easier to manage.
Understanding your finances whether student loans, credit, or savings, is one of the most powerful steps toward becoming more financially confident.
Disclaimer
This article is for general educational purposes only and should not be taken as financial advice.
We are not affiliated with the Student Loans Company, GOV.UK, or any university.
Student loan rules, interest rates, and repayment thresholds can change over time.
Always check the latest information on the official GOV.UK website or speak with a qualified financial adviser before making decisions about borrowing or repayment.
