How do Student Loan repayments work in practice?

Are you a student or graduate who's worried about Student Loan repayments once you begin employment? It is very easy to become confused as to how Student Loans work and what this means for your monthly pay cheque. We understand the need for a jargon-free breakdown when it comes to student finance, so hopefully our blog article will help you to achieve peace of mind when it comes to making repayments.

How are Student Loans collected?

Since 1998 income-contingent student loans have been collected through the tax system, unless the borrower goes abroad for longer than three months, in which case they need to contact the Student Loans Company (SLC) directly to arrange repayments (if appropriate).

It is crucial that the correct type of loan is identified (there is a tool on the SLC website that helps with this). For example, current postgraduate loans in Scotland and Northern Ireland are treated as Plan 1 loan types, and so do not follow the new postgraduate loan repayment rules detailed below.

UK employers deduct student loan repayments through the PAYE system based on information provided by their employee, although HMRC will send employer prompts if they think incorrect deductions are being made. Should incorrect or no information on the loan type be provided, repayments will be deducted as if the employee has a Plan 1 loan.

Where the borrower completes a SA tax return then student loan repayments are calculated and paid through the SA system. However, loan repayments are not included when calculating payments on account.

It’s important to remember that any voluntary repayments borrowers make are not taken into account when calculating payments due through either PAYE or self assessment; instead, such repayments enable the loan to be repaid faster.

How are loan repayments calculated?

Repayment thresholds and rates differ by the type of loan. Generally, for earned income in the 2019/20 tax year:

  • Plan 1 loan repayments are due at a rate of 9% on earnings above £18,935;

  • Plan 2 loan repayments are due at a rate of 9% on earnings above £25,725;

  • Postgraduate loan repayments (England and Wales only) are due at a rate of 6% on earnings above £21,000.


Earnings for student loan purposes are calculated in the same way as for National Insurance contributions, so before calculating loan repayments you may need to adjust the earnings for tips received, for example. However, pension income which is not subject to national insurance is treated as unearned income for this purpose (see below).

Unearned income

If a borrower completes a SA tax return and has more than £2,000 of unearned income, this is also included when calculating loan repayments. The repayment calculation is different for unearned income, because where it is more than £2,000 the whole amount is included, not just the income above the threshold (as would be the case for earned income).

Example 1

Adam receives £3,000 of rental income which is declared on his tax return. The whole £3,000 falls into his loan repayment calculation, not the excess of £1,000 (£3,000 - £2,000).

Multiple loans

When repaying more than one type of loan, interactions between thresholds need to be considered. For example, a graduate with both Plan 1 and Plan 2 loans will have one overall repayment calculated that is allocated between the two types of loan.

So, if earnings are above both Plan 1 and Plan 2 repayment thresholds then the repayment allocated to the Plan 1 loan is the repayment calculated between the two thresholds (9% on £25,725- £18,935) and the Plan 2 loan repayment allocation is based on earnings which are higher than its threshold of £25,725.

Postgraduate loans are different, as they are collected concurrently with Plan 1 and Plan 2 loans, where the borrower has earnings above the relevant thresholds.

Example 2

Jade has a postgraduate loan and a Plan 2 loan and earns £26,000 in 2019/20. She makes repayments of 6% on her earnings in the band: £21,000 – £25,725, towards the postgraduate loan. She will also make repayments at 15% on any earnings above £25,725 (6% on the postgraduate loan and 9% on the Plan 2 loan).

When are loans written off?

This depends on the loan type, where the borrower lived when they took out the loan and when the course started. Loans are written off on death and there is discretion to write off loans earlier if the borrower receives a disability-related benefit and is permanently unable to work.

  • Plan 1 - Conditions are complex, consult the Student Loans Company website.

  • Plan 2 - 30 years after it becomes eligible to be repaid.

  • Postgraduate (England and Wales) - 30 years after it becomes eligible to be repaid.

Problems in practice

These are some of the issues LITRG has come across when helping graduates grapple with some unusual situations. No doubt there will be others we are yet to hear about.


Where the borrower lets residential property, which does not qualify as furnished holiday lettings, the deduction for interest and finance costs is restricted, and relief for those costs is given as a 20% tax credit deducted from the tax liability. However, student loan repayments continue to be calculated using rental profits.

The dis-allowance of finance costs in the taxable profit calculation therefore results in an increase in income and accordingly, an increase in student loan repayments.


When individuals cash in their pension pots, they may not consider the implications for student loan repayments. The taxable pension income (disregarding tax-free pension commencement lump sums) is classed as unearned income, so if it exceeds £2,000 and the borrower has to complete a SA tax return, all of the pension income will be included in the calculation of loan repayments.

Working abroad

When working abroad the borrower should make any repayments directly to the SLC, however if a SA tax return has to be completed on return to the UK, HMRC do not automatically take into account any repayments made while abroad. Thus, in order to avoid overpaying, it is necessary to contact the SLC to transfer the direct overseas repayments to HMRC and then apply to HMRC for a refund.


The above has highlighted some of the complexities of student loan repayments and how important it is to understand the borrower’s position when doing any form of tax planning. There is more information on repaying student loans on the Tax Guide for Students website.

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