Home Personal Finance The only loan you don’t have to rush to take out

The only loan you don’t have to rush to take out

The only loan you don't have to rush to take out

THE class of 2023 is rapidly approaching the end of their education. At the top of their to-do list is a summer vacation with no deadlines and then maybe an attempt to land their first graduate job. Less likely to make that list will eat away at their student loan outstanding balance.

And you know what? That’s no problem. In the UK, the student loan is more of a tax on graduates than a ‘true loan’. If a graduate earns more than a certain amount, student loan payments are automatically deducted from the salary.

The question is whether a graduate has to contribute an additional amount to pay it off? Well, it all depends on how much the outstanding balance is.

For example, if it’s a smaller balance, it might make sense to pay it off because higher interest rates will cause it to rise. If the balance is larger, contributing extra money may not make much of a difference.

Some may want to consider using that money elsewhere – say invest regularly in a Stocks and Shares ISA and/or a SIPP. Ultimately, it’s up to the individual.

How much does a graduate pay back?

The amount a graduate pays back depends on the plan they are on and the salary they earn.

Graduates with Plan 1, 2, 4 or 5 pay back 9% of their income if they exceed the threshold, while graduates with a Postgraduate Loan plan pay only 6% of their income above the threshold1.

Plan type
Annual Threshold
Monthly Threshold
Weekly Threshold

Subscription 1 € 22,015 € 1,834 € 423

Plan 2 £27,295 £2,274 £524

Plan 4 £27,660 £2,305 £532

Plan 5 £25,000 £2,083 £480

Postgraduate Loan £21,000 £1,750 £403

Source: Gov.uk, May 2023

The average debt of the 2021/2022 class is £45,8002. The government expects that only about 20% of full-time students starting in 2021/22 will actually repay the loan in full.

And when you consider that the average graduate salary is just over £24,000, it can take some time for graduates to even start paying back anything.

Even those with above-average graduate salaries pay only a small amount per month. It won’t be nearly as noticeable as, say, income tax or national insurance.

As interest is added to the loan, the outstanding balance will inevitably increase. Student loan interest rates are usually based on RPI inflation.3 While in college, until April after graduation, graduates are charged RPI + 3%.

How can young people lay a solid financial foundation?

Life is certainly not easy for young people right now. There is the ongoing cost of living crisis we are facing, high inflation and rising real estate prices, so taking steps towards financial security has never been more important.

That doesn’t necessarily mean they have to suck the joy out of life – they can still build a secure financial net and have fun.

Here are two steps they can consider:

Create a rainy day fund worth about 3 to 6 months of a monthly salary to put their finances on a solid financial footing. Also create a nice fund – a jar especially for travel or hobbies. Set up a periodic savings plan and contribute to a Stocks and Shares ISA or to a Self-Invested Personal Pension (SIPP).

That can feel daunting for those fresh out of college. Researching stocks may not be everyone’s cup of tea, so a fund can be a good entry point. It will allow exposure to the stock market and will be diversified – an important pillar of investing.

A tracker fund is also an inexpensive way to enter the stock market. Check out 4 tracker fund ideas from our Select 50.

A graduate’s first paycheck can make him or her feel on top of the world. Blowing the money is easy, but making sure hard-earned money has value in the future pays off.


1 GOV.UK, 11 May 2023
2 UK Parliament, December 2, 2022
3 Expert Savings, April 6, 2023

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