What Happens if You Don't Pay Your Student Loans? (UK)
Graduating from university is an exciting moment, but it comes with an anxiety-inducing dose of reality: student loan debt. While sizing up the loans that funded your education can be daunting, keep in mind that you’re not alone. The burden of student loan debt is familiar to students across the UK, and fortunately, the UK has a system in place to ensure that paying back student loans doesn’t become too burdensome.
Here, we’ll walk you through everything you should know about paying back your student loans, what happens if you don’t pay them back, whether you should pay them off early, and whether they’ll impact your credit score.
How Do You Pay Back a Student Loan in the UK?
Repaying your student loans in the UK is quite simple, as HMRC collects student loan payments through a pay-as-you-earn (PAYE) system. This means that beginning the April after you graduate, payments for your maintenance loan and your tuition will be automatically deducted from your earnings that surpass a certain threshold.
In 2023, 9% of your pre-tax income above the following thresholds will be deducted to repay your student loans:
- Plan 1: £21,195/year, or £1,682/month
- Plan 2: £27,295/year, or £2,274/month
- Plan 4: £25,375/year, or £2,115/month
So, if you were on repayment plan 2 and had an annual income of £29,000, you’d have 9% of your income above £27,295 taken out of your wages. At that rate, you’d have approximately £13 taken out of your monthly wages—hardly more than the cost of a couple pints.
Keep in mind that these repayments will automatically stop and start as your income rises above or falls below the repayment threshold, meaning you’ll never have to worry too much about whether you’ll be able to afford your repayment.
Not sure what payment plan you’re on? Find out fast with the Government’s guide.
What if You Don’t Pay Your Student Loans Back in the UK?
As we mentioned, paying your student loans back is an automatic process. If you earn above either £27,295 or £21,195 depending on your repayment plan, your student loan repayments will be taken from your paycheck just like National Insurance Contributions or any other tax. If you don’t earn above that threshold, you don’t need to worry about not paying it back, as you’re not required.
But what if you never earn above the repayment threshold? Will you have student loan debt hanging over your head for your entire life? The short answer is no.
The longer answer depends on your payment plan:
- Payment plan 1: Your loan cancellation depends on when you took out the loan: if you took it out prior to 1 September, 2006, it will be cancelled when you turn 65. If you took your student loans out on or after 1 September, 2006, they’ll be cancelled 25 years after they first became due.
- Payment plan 2: Your loans will be cancelled 30 years after they first became due.
- Payment plan 4: For payment plan 4, your loan cancelation also depends on when you took out the loan. If you took it out during or prior to the 06/07 academic year, it will be cancelled 30 years after it first came due, or when you turn 65—whichever comes first. If you took it out during or after the 07/08 academic year, it’ll be cancelled 25 years after it first came due.
Should You Pay Off Your Student Loans Early in the UK?
You can make additional payments on your student loans, but we wouldn’t advise it for three reasons. First, even if you make additional payments to lower your debt incrementally, your employers are still legally obligated to deduct that 9% from your earnings above the repayment threshold, so you’ll be paying double.
Secondly, your student loans are constantly accruing interest. It’s something scary to consider how quickly those debts can grow, but understand that aside from those who become exceptionally high earners, very few people will ever repay their entire student loan before it’s cancelled. While making additional payments might be a nice gesture toward the debt you’re liable for, it’s ultimately not the most prudent way to use your money.
Do Student Loans Affect Your Credit Score in the UK?
Finally, the third reason you shouldn’t pay off your student loans early is because student loans do not affect your credit score. Whether you’ve repaid half of your student loans or you haven’t made the smallest dent in it, it won’t have an impact on your credit score.
There is a small exception to this, which is that mortgage lenders can take your student loans into consideration before extending you a mortgage, but your student loans won’t impact your ability to qualify for products like credit cards, personal loans, or a phone contract.
Build Your Credit Score During University to Save Money After
While student loan debt is unlikely to be a massive burden for you and won’t impact your credit score, there’s still a lot you can do during your education to prepare your finances for the world beyond university. One of the smartest things you can do is to build your credit score.
A strong credit score is not only vital for getting the most favourable interest rates and credit products, but it can save you thousands of pounds over your lifetime. However, building a good credit score from scratch isn’t always easy. That’s why we built Pave. With Pave, you can learn what impacts your credit score and how you can improve it, track your monthly bills, and use our credit line to actively build your credit score.