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LITRG takes a look at student loan repayments including the basics, some less well known facts and a few final notes of caution. 

Student loans and the tax system – the link

Although student loans are administered by the Student Loans Company (SLC), the tax system is used as the main means of collecting repayments on ‘income-contingent’ loans. Repayments are made either via employers through Pay As You Earn (‘PAYE’) or, in some cases (for instance if you are self-employed), via Self Assessment when you complete your tax return. Note that the old ‘mortgage-style loans’ are dealt with differently and are not covered within this article.

When do you start repaying your student loan?

Student loan borrowers who took out what is known as an ‘income-contingent loan’ (basically, loans from August 1998) and who completed or left their higher education course recently may have had to start making repayments from 6 April 2010 if they are earning over £15,000 a year. Although there was some discussion about increasing the threshold at which repayments begin, it has been announced that it will remain at £15,000 until at least April 2011.

You should note that the SLC have procedures in place for collecting repayments direct in certain situations – for example, if the borrower has gone abroad or for employees who have nearly cleared the full balance of their loan and who opt out of PAYE repayments (see below).

You can find further information on how student loan repayments work by following the ‘useful links’ below, but in very basic terms repayments are due at a rate of 9% on the borrower’s earnings over £15,000 a year (whether from employment or self-employment); and also at 9% on other income over £2,000 a year. 

Self Assessment ‘short’ tax return – 2009/10

HMRC are now allowing student loan borrowers to use the short tax return for the year to 5 April 2010.  But there are a couple of points to note:

1. This is only relevant if you file a paper tax return – the online system takes you through the full tax return anyway (but allows you to tailor it so you only complete those parts relevant to you); and
2. You can only use the short tax return if HMRC have issued one to you – that is, if they have sent you the full version you cannot request the short tax return instead. 
   

Nearly repaid your loan balance in full?  Consider your options

If you are making repayments as an employee and getting close to full repayment of your loan, you might want to think about whether you can opt out of the usual PAYE repayments to save overpaying and then having to get a refund from the SLC. You could instead check if the SLC will allow you to pay by direct debit direct to them for up to the last two years (assuming for example that you keep earning, and therefore repaying, at the current rate). 

The SLC might write to you offering this option or, if they have not done so, you can contact them to ask if you are eligible (you might need to produce evidence such as your recent P60 and payslips). Our article ‘Student loans – don’t repay too much’ gives more information.  

There is also some help available for Self Assessment borrowers approaching full repayment. If you are in the situation where you think the amount due under the Self Assessment calculation is too much - ie, that you will then be owed money back by the SLC – you can apply to HMRC for an informal ‘stand over’.  This is explained in the ‘overpayments’ section of HMRC’s leaflet CSL1 – Collection of student loans for SA Customers.

Payment plans – a word of caution for Self Assessment borrowers

One facility HMRC offer for payment of Self Assessment liabilities, including student loan repayments, is a regular direct debit – known as a ‘Budget Payment Plan’ (‘BPP’). This allows you to pay by instalment, subject to certain conditions. 

Many people might be put off, however, because there is no incentive for what is essentially early payment of your tax bill – for instance there is no interest paid to you on amounts paid before the due date. But perhaps some taxpayers nevertheless prefer to pay by regular instalment than having to find the money in a single lump sum.

For student loan borrowers repaying via Self Assessment, there is however a possible disincentive to taking up a BPP. As the effective date of repayment will still be treated as 31 January following the end of the tax year, your interest will still be clocking up on the outstanding student loan balance even though HMRC have your money early. 

Example

Chas has a student loan.  He starts a new business in 2009/10 and his taxable profits are £20,000, so his tax bill for the year is £2,705.  In addition, he has £1,142 of Class 4 National Insurance (‘NIC’) to pay.  His student loan repayment is a further £450. On top of that, he has to find payments on account (‘POAs’) for 2010/11 of half his tax and Class 4 NIC liability for 2009/10 on each of 31 January and 31 July 2011. Payments on account are not due on the student loan repayment. 

The amounts he has to pay come as a bit of a shock to Chas, so he decides to start paying towards the amount he owes on 31 January by entering into a direct debit BPP with HMRC. Luckily he gets his tax return done early and his plan is set up in May 2010, allowing him nine months to spread the payment at £691 a month. Of this, £50 a month is his student loan repayment.

Let’s look at his total payments (not including Class 2 NIC) in the table below:

By paying in instalments under the BPP, his ‘tax’ bill is therefore cleared by 31 January 2011 and he can go on making regular payments towards his July payment on account if he wishes. HMRC do not give him interest even though he has paid early, but equally none is charged.  But when Chas gets his student loan statement, he will see that the £450 he has repaid is only taken off his loan balance at 31 January 2011, even though he parted with the money in instalments over the course of the preceding nine months. Interest is added to the student loan balance at the prevailing rate taking no account of the fact that he paid early.  However, at the time of writing, the interest rate is nil – current rates can be found on the SLC repayment website (see ‘useful links’ below). 

So, what could Chas have done instead? Well, he might have considered putting his tax money aside in a separate interest-bearing bank account (perhaps using an Individual Savings Account, subject to certain limits, on which the interest is tax-free) and paying the balance in full on 31 January. But this does mean he has to resist the temptation to draw on the funds in the meantime.  

Unfortunately, Chas cannot instead pay the £50 a month straight to the SLC. If he were to do so, these would be treated as extra payments and he would then find an unwelcome surprise – that he still has to pay the £450 due under Self Assessment on 31 January 2011 anyway. 

And finally… employees beware

As noted on this site and in the wider press, there have been significant problems with 2010/11 PAYE codes for taxing employees’ earnings from 6 April 2010. If you are new to student loan repayments, you could find that your pay is lower this month because of deductions your employer now has to make.  But do make sure that you check your payslips to make sure that new student loan deductions are the only change and that there is also not a further, less obvious, tax change which might indicate a problem with this year’s PAYE code.  

Useful links

Student Loan Company repayment website

LITRG guidance on student loans

HMRC guidance on 2010/11 PAYE codes