A freelancer's guide to paying off a student loan

If you've got student debt and you're starting a career in fashion, read this.

This series will explore the different financial considerations freelancers often passively make but don't actively interrogate. First up: student loans. This is specifically for students who borrowed money in the UK, though some of this advice might be useful to anyone who took out a loan with interest to pay for their studies.

In the coming weeks, we'll be exploring other forms of loans, grants, mortgages, tax returns, insurance, day rates, and anything you might want expert advice on – just leave us a comment. We're making this first edition free for all our subscribers.

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Arriving at university with £20,000 a year (£9,250 in fees and up to £13,348 for maintenance) courtesy of the government is all fun and games until it’s time to pay it back. Those who enter corporate, salaried jobs and graduate schemes straight out of university will soon start noticing its monthly subtraction from their pay packets, but can feel reasonably assured of the fact they will one day pay it off. But what about those who don't? How does a debt of £60,000 affect the future of a freelancer or creative embarking on a career in a badly paid industry? And what if they come into some money – a gift, an inheritance, a prize, for example – should they pay off a chunk of their loan?

For UK students who started university before September 2012, when fees and interest rates were much lower, they are currently paying back on the Plan 1 rate. If you started your course between 1 September 2012 and 31 July 2023, you’ll be on Plan 2; and if you started your course after August 2023, you’ll be on Plan 5. Graduates now start repaying 9% of their income on their loans over £25,000, rather than £27,295 like it was before, and it only gets wiped after 40 years rather than the 30 it was before. Plan 5 caused controversy when it was introduced in 2023, during a period of massive inflation, because the interest rates you pay on them is the RPI (retail price index). The interest was around 7% on those loans – a higher rate than you would get on a lot of commercial loans.

Alex King, founder of Generation Money, which was created with the aim of encouraging young people to take control of their own finances, says student loans are “effectively a tax for their education.” He adds, “It reduces your earnings, you're paying 9% on your student loan that's just accruing more debt, it's a very unfair way to start life for young people.” But, it’s not all doom and gloom. “Most people who are low or middle earners, you're never going to repay that loan, so for the vast majority of people, it doesn't make sense to repay your loan in full.”

Here, we’ve asked Alex to demystify student loan repayments.

Should you pay off chunks of it if you get some money?

People should be very cautious making overpayments on Plan 5 student loans. Your repayments don't change when you make overpayments, and it's to do with how the interest works: you're charged whatever the RPI rate is in September every year; it's been pretty high recently, and for a lot of people, if you come out of university with £40,000 of debt, 7% or 8% interest on that added each year is a pretty substantial amount to your total balance.

The way the repayment works is that 9% of your earnings above £25,000 goes to repay your loan. If you overpay it doesn't have a huge impact on your repayments going forward unless you can wipe it out. You need to work out how much you think you will earn in the next 30-40 years, and if you are going to earn £50-60,000 a year, you will eventually pay off your student loan. If you know that you are going to pay it off in the future, then it makes sense to overpay, but if you will earn £30-40,000 in the next 40 years, then it will never get paid and it will get written off for you, and it doesn't make sense to make overpayments.

There was an example where a student got an inheritance from her grandparents and paid off £20,000 on her student loans, but it was burning the money because she wasn't going to repay anyway, and it didn't reduce her monthly payments after making the overpayment. By making overpayments, you're fighting against the current. If you are a higher earner and earning £60,000 or more for the next 10-20 years, then you will pay off your student debt, and then it makes sense to make overpayments and you save on interest.

Does the interest go up over time?

There were ten to fifteen years of grads paying 1.5% interest, but with inflation, interest rates are much higher, and grads are getting hit with much higher interest rates. It’s another way that young people are getting absolutely nailed these days. The amount you repay isn't related to the amount of debt, it's based on your earnings, so someone who has accumulated a lot of student debt and earns £30,000 isn't going to repay that debt unless they make a huge amount of overpayments.

The way the repayments work on Plan 5 loans is that you repay 9% of your salary above £25,000 regardless of how much student debt you have. For example, someone with £50,000 in student debt who is earning £30,000 per year would pay 9% of £5,000 (£30,000 minus £25,000) in annual repayments, which is £450. But the interest rate – last year, at least – was at one point around 8%.

So, 8% interest on a loan of £50,000 would be £4,000 per year, but if you're earning £30,000 you would only be repaying £450 per year. So by the end of the year, your student loan balance has increased by £4,000 minus £450 = £3,550. Your new balance is £53,550. So your student loan balance has actually got bigger.

What happens when you go abroad?

You should let the student loan company know that you’re abroad for more than three months and make repayments if you’re over the repayment threshold. When you come back to the UK it will be picked up again. Unfortunately, the interest keeps accruing on the balance even if you go abroad and don't meet the repayment threshold. The Student Loans Company may also ask you to make extra repayments to cover any arrears arising from months where you didn't pay while abroad.

Don't repay over saving

If you're only earning £30-40,000 after accumulating all that debt, you're probably better off doing other things with your money than paying off that student loan. Put it towards a deposit on a house or anything else. You're not going to change what you're repaying. If you make an overpayment of £10,000 on a £50,000 student loan balance, you'll have £40,000 left but you'll still be paying back the same amount as you were before you were paying back the overpayment. They don't reduce the monthly payments, which is unlike an overdraft or credit card debt or a mortgage.

If you are a freelancer, what do you do?

As a freelancer, you log into your student financing portal and tell them you are self-employed or a freelancer, and when you file your tax return at the end of the financial year, you will be told how much you owe in student loan repayments. You can either pay the student loan payment due alongside any tax due, or you can make a voluntary payment directly to the Student Loan Company at any time.

What could impact your credit score?

Student loans don’t go on your credit report or credit score directly, but they will get taken into account if you want to get a mortgage; they will look at your monthly payments as an affordability check but not a credit check. But if you didn’t pay your student loans for a while it wouldn’t affect your credit score. Student Loans Company can take legal action if you stop repaying your student loan when you're above the threshold to do so. This can ultimately end up in them pursuing you through the courts which could lead to a County Court Judgement which would then affect your credit score.

By Emma Russell