Are you in danger of overpaying your student loan?
If you took out a student loan from the SLC (Student Loans Company) since 1998, you probably have what is known as an income-contingent student loan. These are different from the previous "mortgage-style" loans, which were paid off at a fixed amount each month, in that you pay more off each month as you earn more money.
Since the amount you repay does not depend on the amount that you owe, deductions can continue long after you have in fact repaid the total amount of the loan (plus any interest accrued). There are a few things which you should know so you can help prevent this happening to you.
How Student Loan Repayments are Calculated
The student loan is repaid through PAYE, maintained by your employer, or by HMRC through Self Assessment, if you are self employed. For those who started their course before 1st September 2012, repayments are made at a rate of 9% of any income over £17,775 per year. If you are paid weekly or monthly, this amount is divided by 52 or 12 and rounded down to the nearest pound. This is called Plan 1.
If your course started after 1st September 2012, repayments are calculated in a similar way but you will pay only 9% of earnings over £21,000, again rounded down to the nearest pound - this is called Plan 2. This means that you will repay less each month (or week) than you would if you were on the previous repayment plan, but because of this it will take longer to repay your loan.
To see how much you should be paying, you can use our student loan repayment tool. From this, you can see that whether your outstanding loan amount is £1,000 or £20,000, you'll pay the same amount each month as long as your salary remains the same.
How you Might Overpay
The outstanding amount of your loan is managed by the Student Loans Company, and your repayments are tracked by HMRC. At the end of each tax year, your employer tells HMRC how much they have collected for your student loan repayments, and HMRC passes this information on to the SLC. They then calculate the remaining balance, taking into account your payments and the interest accrued. When you have repaid the full amount of your loan (and interest), they tell HMRC that you no longer need to make payments, and HMRC instruct your employer to stop making student loan deductions.
As you can probably see, since the balance of your loan is only calculated once a year, it would be easy for you to keep making contributions throughout the year when in fact you had already paid off the loan. It can also take some time for the "stop" message to make its way from the SLC to your employer. So what can you do to prevent this?
How You Can Prevent Overpayment
The Student Loans Company have a very useful website called Student Loan Repayment. As well as detailed information about how loans are repaid and the calculations that are used, if you already have a student loan you can log in and see the latest balance that the SLC have calculated. As we said above, however, the SLC only calculates the outstanding balance once a year, so they have a very useful tool which allows you to enter details of any payments you have made since the balance was last calculated (refer to your payslips) and estimates what your current balance will be.
If you do this, and realise that you are close to completing payment, there are a couple of things you can do to prevent overpayment.
Repay the loan in full by debit card
If you have calculated the balance of your loan to be low enough that you would like to pay it off in a lump sum, you can do so over the phone or using the Student Loan Repayment website. There are card payment options for paying off the full loan, or you can make smaller payments to reduce the amount you owe, if you don't want to pay it all off just yet. If you pay off your loan, the SLC will send a "Stop" notification to your employer to prevent them making further deductions - you will need to check with your employer to make sure they receive this - otherwise you might keep paying!
Repay the loan with Direct Debit payments
You can also set up a Direct Debit instruction to repay the loan with a fixed amount each month until it is completely repaid - instead of the PAYE deductions from your payslip. The SLC will work out how much you have to pay them and for how long to repay the loan amount. They will also instruct your employer to stop making deductions, although it would be wise to make sure your employer receives this instruction from the SLC or you may end up overpaying.