Is student loan repayment system fair?

timoneill84

I've recently discovered the way repaying my student loan works exactly, I pay a certain amount to the HMRC every month and they then pay the student loans company at the end of each tax year. After getting a statement through recently I realised i'm getting charged monthly interest on the same balance over the year though & the balance is only updated every year (start of the tax year), surely this isn't fair? If I was to take a bank loan out the balance would drop each month as I was paying it off each month and interest would be charged each month as well. When I asked SLC about this said up they told me it was all to do with compound interest which didn't really answer my question!

fwor

Whether the whole student loan system is fair is a subject that is under debate at the moment but, until someone decides to change the system, it is what you sign up to when you joined the scheme.

Interest on your balance will be calculated in a standard way, assuming a reducing amount outstanding, and therefore a reducing amount of interest due each month. However, once the total amount of interest has been calculated it is added to the original amount owed and then divided up by month. They do it like this so that what you end up paying are the same amounts each month - which makes it easier for people to plan for than if the amount were to change each month.

So yes - the way that interest is calculated will have been done fairly.

tykesi

timoneill84 wrote: »

I've recently discovered the way repaying my student loan works exactly, I pay a certain amount to the HMRC every month and they then pay the student loans company at the end of each tax year. After getting a statement through recently I realised i'm getting charged monthly interest on the same balance over the year though & the balance is only updated every year (start of the tax year), surely this isn't fair? If I was to take a bank loan out the balance would drop each month as I was paying it off each month and interest would be charged each month as well. When I asked SLC about this said up they told me it was all to do with compound interest which didn't really answer my question!

Why didn't you query this before you took the loan out? That's the time to question whether something is fair or not and decide whether you want to sign up to it.

ReadingTim

You agreed the repayment calculation mechanism was fair when you took out the loan. There are many loan products which don't update the balance of a daily basis - some mortgages don't for example.

As long as the method of calculating interest is detailed in the T&Cs and available before the customer signs up to the product (or during the application process) then yes, it is "fair".

A bank, loan company etc cannot be responsible for its customers failing to read or understand the T&Cs/how the product works - that responsibility lies with the customer - you.

timoneill84

"Why didn't you query this before you took the loan out? That's the time to question whether something is fair or not and decide whether you want to sign up to it."

Because when I was 18/19 I probably wasn't as sensible as I am now at 32 and didn't read the T&Cs!
I fully understand it's probably my fault but just wanted an explanation into the exact process really.

Thanks fwor this line was what i was after and helps clarify it "However, once the total amount of interest has been calculated it is added to the original amount owed and then divided up by month". Much clearer than the answer I got from SLC!

NineDeuce

Of course its fair.

Which other form of loan allows you to pay only after you reached an earnings threshold and has the remaining balance written off after 25 years?

sheramber

fwor wrote: »

Whether the whole student loan system is fair is a subject that is under debate at the moment but, until someone decides to change the system, it is what you sign up to when you joined the scheme.

Interest on your balance will be calculated in a standard way, assuming a reducing amount outstanding, and therefore a reducing amount of interest due each month. However, once the total amount of interest has been calculated it is added to the original amount owed and then divided up by month. They do it like this so that what you end up paying are the same amounts each month - which makes it easier for people to plan for than if the amount were to change each month.

So yes - the way that interest is calculated will have been done fairly.

That only works for mortgage style loans.

Plans 1&2 are repaid at a percentage of your earnings over the earnings limit. So payment will vary as your wages/salary varies.

When HMRC send the payments details to SLC they also provide the dates on which each payment was made so interest can be calculated accordingly.

Ed-1

sheramber wrote: »

That only works for mortgage style loans.

Plans 1&2 are repaid at a percentage of your earnings over the earnings limit. So payment will vary as your wages/salary varies.

When HMRC send the payments details to SLC they also provide the dates on which each payment was made so interest can be calculated accordingly.

The interest is calculated as if the repayments were received on the last day of each month during the tax year:

where an amount is deducted by an employer under Part 4, that amount must be aggregated with all other amounts deducted in the same tax year and repayments of the aggregate amount will be considered to have been received by the Authority in equal instalments received on the days during the tax year which are–
the last days of a month;

http://www.legislation.gov.uk/uksi/2009/470/regulation/17/made