Student Loan Repayments - Massive Con

haroldsacks

I have been recently been having some dealings with the SLC/HMRC etc. due to paying off my student loan in full.

I noticed something very interesting (not very surprising either). Firstly, it seems to be very disorganised and a far from optimal setup i.e. communication between SLC and HMRC is dysfunctional and causes no-end of problems.

The second thing is, which is the reason for this post, it seems anyone who pays the loan through PAYE is being blatantly ripped off.

Interest is charged per month - according to my statements - but HMRC make their payments to SLC on the loaner's behalf, on an annual basis. So, even though the loan is being paid off monthly, the loan is still accruing interest on money that has actually been paid back.

So, for example, let's say £1200 is paid off a year at £100 a month with an annual interest of let's say 1.5%

Month 1 you would expect the interest to be 1.5 of 1200 = £ 18 / 12 = £ 1.5
Month 2 you would expect the interest to be 1.5 of 1100 = £ 16.5 / 12 = £ 1.375
Month 3 you would expect the interest to be 1.5 of 1000 = £ 15 / 12 = £ 1.25
Month 4 you would expect the interest to be 1.5 of 900 = £ 13.5 / 12 = £ 1.125
Month 5 you would expect the interest to be 1.5 of 800 = £ 12 / 12 = £ 1
Month 6 you would expect the interest to be 1.5 of 700 = £ 10.5 / 12 = £ 0.875
Month 7 you would expect the interest to be 1.5 of 600 = £ 9 / 12 = £ 0.75
Month 8 you would expect the interest to be 1.5 of 500 = £ 7.5 / 12 = £ 0.625
Month 9 you would expect the interest to be 1.5 of 400 = £ 6 / 12 = £ 0.5
Month 10 you would expect the interest to be 1.5 of 300 = £ 4.5 / 12 = £ 0.375
Month 11 you would expect the interest to be 1.5 of 200 = £ 3 / 12 = £ 0.25
Month 12 you would expect the interest to be 1.5 of 100 = £ 1.5 / 12 = £ 0.125

But in fact, they charge you a consistent £1.5 for every month which equates to you paying interest on money you no longer owe.

Is this common knowledge? Am i getting something wrong somewhere? Has anyone else noticed this?

Any thoughts, remarks or advice would be much appreciated.

HS.

DrEskimo

The statements outline the monthly interest, but as the annual statement is updated with your annual payment from PAYE, the interest is recalculated on the reducing balance each month.

Since SLC don't know exactly how much you are paying monthly, they can't reflect this in real time on your statements. But I am almost certain the interest reflects a reducing monthly balance. Could be wrong.

There was a website that explained it, or perhaps it was on one of my statements. Can't find it now though...

Decor58

I've just gone through and double checked all the interest calculations for my statement and we're not being ripped off, the statement is just misleading.

The statement says SLC receive a single annual payment from HMRC, which is correct, but what it doesn't say is they then divide it by 12 and calculate the monthly interest for the previous year as if you'd made 12 equal monthly payments.

Additionally, they effectively calculate the interest daily, so to calculate how much interest you should pay in a given month, you need to do the following:

1. Take your annual interest rate (i.e. 1.5%) and raise it to the power 1/365 (calculate the 365th root), which give a daily interest rate of 0.0041%.
2. Raise your daily interest rate to the power of 30 (assuming 30 days in current month, adjust as appropriate) which gives a monthly rate of 0.12%
3. Use this rate, with the previous month's balance to calculate the current months interest payment, then take off 1/12th of your annual repayment to get the current month's balance for calculating interest for the next month.

The reason you need to use powers (or roots) rather than just divide by 365 is because of compound interest.