Secured vs Unsecured Debt and Student Loans: What repayments are a priority?

Before we get into the different types of student loan repayments it is important to look quickly at different debt types and what sets a student loan debt apart from any other type of loan debt. NOTE: The student loan repayment details are based on the information available as of March 2023. I will aim to amend this post each year to keep it up to date.

Unsecured vs Secured Debt

A student loan debt is classified as an unsecured debt. This is similar to utility bills, credit cards, overdrafts or personal and payday loans. It is called unsecured debt as it is not backed by an underlying asset such as property; there is no security backing up the debt. If you fail to repay a debt such as this, you may receive calls or a visit from a debt collector. Debt collectors have no right to enter your property and take items to cover the debt as it is not secured. For guidance on the two main ways of paying off debts, you can click on the Avalanche and Snowball methods link.

Secured debt can include car loans and mortgages where an asset is secured against the loan. In this case, if you fail to keep up with repayments then you may be visited by a bailiff (or enforcement agent) who has a legal right to enter your property and remove your goods in order to sell them and repay the debt. (There are specific items they cannot take, however.) This is only usually the case following a court action once other avenues that have been explored to collect the debt have failed. An unsecured debt could be turned into a secured debt by a court if a court order is in place to enforce payment.

If you have any worries about debt that do not concern student loans then I would recommend visiting the debt charity Step Change for further advice.

Why is a student loan different to other unsecured loans?

Unlike other unsecured loans a student loan has a 'lifespan', an amount of time after which the debt is written off. There is no need to worry about when to start paying it back or even if you need to pay it back. If you have a personal windfall rather than pay off the debt you would probably be better off paying any other type of loan or investing/saving the money. You won't have debt collectors or bailiffs visiting your home because the debt is unpaid. The date the debt is written off depends on which loan repayment plan you are on. Some people may never earn enough to pay it off whilst others may earn enough to begin paying the loan off but find that it is written off before it is paid off. Unlike other loans, it will not appear on your credit file and therefore does not appear when you are applying for a mortgage for example. However, you do need to declare that you have the loan as it still forms part of your overall financial situation and could still affect the mortgage offer based on the amount you pay towards the loan and how much debt is outstanding. Unlike other loans, you do not need to prioritise paying off your student loan.

When do I start repaying my student loan?

Technically you will start paying back your student loan from the 6th of April the year after you graduate. However, you still need to meet a minimum earnings threshold so when you start repaying your student loan depends on your plan.

1. Plan 1: This is for students who started their course before September 1st 2012 (or since September 1998 in Scotland and Northern Ireland). The interest rate for Plan 1 is currently set at 4.5% (as of March 2023) which is based on the Retail Price Index (RPI) or the Bank of England base rate plus 1%, whichever is lower.  The repayment threshold is £19,895 (as of April 2022).
2. Plan 2: This is for students who started their course on or after September 1st 2012 in England and Wales. The interest rate for Plan 2 is currently set at 6.5% (as of March 2023) which is based on the RPI plus 3%. The repayment threshold is £27,295 (as of April 2022).

Once you hit the repayment threshold you pay your loan back through the tax system via HMRC. Currently, you would pay 9% of your income over the repayment threshold. If you are self-employed then it is up to you to let HMRC know when you fill out your tax return so that the correct amount can be calculated.

As an example, if you were on payment plan 1 and you were earning £21,000 a year you would pay 9% on £1,105 which is the amount you have earnt over the threshold value which works out at approximately £55 a year or £4.50 a month. If you were on payment plan 2 and earnt £30,000 a year then you would pay 9% on £2,705 or approximately £245 a year or £20.40 a month.

Could my loan be written off?

Again this will depend on your payment plan as detailed below.

1. Plan 1: If the loan was taken out before September 1st 2006 then the loan and any interest will be cancelled when you reach 65. If it was taken out between the 1st of September 2006 and before the 1st of September 2012 then it will be 25 years after the April you were due to start paying it back.
2. Plan 2: The loan and any interest will be cancelled 30 years after you were due to start paying the loan back.

My debt conclusion

It may take time and effort, but paying off debt is a worthwhile goal that can bring many benefits. By paying off debt, you can reduce the amount of interest you pay, improve your credit score, and increase your disposable income. It's important to remember that paying off debt is not a one-time event but rather a continual process that requires discipline, perseverance, and a willingness to make financial choices that align with your goals. Ultimately, by taking control of your debt and making a plan to pay it off, you can achieve greater financial security and peace of mind.