This article was first written for and published on AccountingWEB.
To mark International Students’ Day on 17 November, Reshma Johar reflects on the challenges former students face dealing with student loans.
According to the Higher Education Statistics Agency, the total number of undergraduates in 2019/20 were 1,889,475, broadly in line with the previous year. The recently published House of Commons Research Briefing: Student loan statistics, states that the value of outstanding student loan debts in UK/ England reached £160 billion by 31 March 2021.
Recent tinkering’s to student loans
Since 2016/17 students coming from underprivileged backgrounds are no longer be able to benefit from a tax-free grant, which used to be worth around £3,500. Instead, it has been replaced by a maintenance loan. Undergraduate students who began their course before the changes came in will continue to be eligible to apply for the grant.
In 2017 the Government fixed the university fee cap at £9,250, an increase of £250 from 2016. This has remained frozen since then and is set to remain at that level for another year under government proposals. In May 2019 an independent report was published, which recommended the fee cap should be reduced to £7,500.
Also, in 2017 the Government increased the student loan repayment threshold to £25,000, which is expanded on below.
Student loan debt
Once a person has completed their studies, they will have a debt made up of tuition fee loans, maintenance loans and postgraduate loans, all repayable to the Student Loans Company (SLC). Repayments of the loan will only need to be made once the person is earning (either through employment or self-employment) above the repayment threshold. Of course, the person may choose to repay the loan sooner, which can be done without triggering any penalty.
Student loan repayments for those who are employed are collected via PAYE and paid over to HMRC who then allocate these funds to the SLC. Therefore, if the person is employed, the payroll team will need to establish which loan plan the person was on to then work out what level of repayment needs to be collected.
If the person is self-employed, the annual amount to be repaid will be determined by what loan plan the person is on and their profits. The repayment will be calculated via their self-assessment tax return, and the amount due is paid over to HMRC and then allocated against the SLC debt.
If the person is a shareholder of a company, their dividends will also be taken into account, when working out what repayment is due. Trust income can also be counted towards earnings for the purposes of what repayment is due.
The repayment threshold will depend on which of the four current plans the person is on. Broadly the plans are based on when the student started an undergraduate course or postgraduate course. See below the thresholds for 2021/22:
- Plan 1: When a person earns (employed or self-employed) is over £382 a week, £1,657 a month or £19,895 a year (all before tax and any other deductions).
- Plan 2: When a person earns over £524 a week, £2,274 a month or £27,295 a year (all before tax and any other deductions).
- Plan 3: When a person earns over £480 a week, £2,083 a month or £25,000 a year (all before tax and any other deductions).
- Postgraduate loan (a Master’s loan or a Doctoral loan): When a person earns over £403 a week, £1,750 a month or £21,000 a year (all before tax and any other deductions).
If a person’s earnings do not exceed the threshold, repayments will still be due if the person has other taxable income exceeding £2,000 (which is coincidentally the same amount as the dividend allowance) and the total income in the year exceeds the repayment threshold.
The amount repaid again depends on the plan:
- Plan 1: 9% of amounts earned over the threshold.
- Plan 2: 9% of amounts earned over the threshold.
- Plan 3: 9% of amounts earned over the threshold.
- Postgraduate loan (a Master’s loan or a Doctoral loan): 6% of amounts earned over the threshold.
Chris Clayton from CBW Financial Planning often works with families looking to fund younger members of family to attend higher education without triggering a student loan debt.
“It is natural for parents and grandparents to want to help their children. There are many options but there are also things that need to be considered and potential pitfalls too,” Clayton commented.
“Whether you are lump sum funding or pre-planning with regular savings, it is all about doing the numbers and fully understanding the various tax wrappers available. I would always suggest taking professional advice and the sooner the better.”
It is vital that the person is aware of which loan plan they are on. Any repayments made to the wrong plan will be lost. If there is any uncertainty, they should contact HMRC.
A person with a student loan should frequently check their annual statement from the SLC. If they are close to repaying the full loan, they should set up a direct debit instead of having this collected via their PAYE income or through their self-assessment tax return.
The payroll team will not be able to stop collecting the loan repayment until they have received a stop notice which is usually issued by HMRC.