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Repayment Costs for UK Postgraduate Loans: A Guide, with Examples

Postgraduate loans for Masters degrees have now been confirmed for the 2016-17 academic year, but how will they actually work financially? How much of an impact will a Masters loan have on your salary? And when will you actually have to start repaying it?

The good news is that the finalised plans for the loans have relaxed several aspects of their repayment criteria. You'll now only repay your loan at 6% of annual income over £21,000. The date at which repayments begin has also been pushed back to 2019.

Here at FindAMasters we’re delighted to see the government commiting to these loans - and relaxing many of their eligibility criteria.

However, we also recognise that prospective postgraduates want (and deserve) to be fully informed about the costs of taking on an additional student loan.

Changes to the loan repayments also mean that comment based on earlier versions of the scheme may now be out of date - and potentially misleading.

That’s why we’ve revised our guide to the repayment system for postgraduate loans. As well as explaining how repayments will work in theory, we've also put together some practical examples of 'real world' repayment scenarios.

Please note that the information on this page only applies to the postgraduate loan scheme in England, confirmed for 2016-17. Seperate proposals have been made for Masters loans in Scotland and Northern Ireland, but repayment plans for these haven't been confirmed.

What impact will Masters loan repayments have on your salary?

You may have come across reports suggesting the total deductions for a graduate with a postgraduate loan could be as much as 50% of your salary. This obviously seems rather high, but it’s also a little misleading.

There are two things you need to bear in mind with respect to that 50% figure. The first is that it actually refers to something called a ‘marginal withdrawal rate’. This combines the various different salary deductions you could be subject to as a graduate.

The second is that it's out of date.

Salary deductions with a postgraduate loan

The actual marginal withdrawal rate for someone with an undergraduate and postgraduate loan, earning over £21,000 would now be 47%, not 50%. This is the combination of all the deducations that might be made from your salary

For most people those deductions would be:

  • Income tax - 20%
  • National Insurance - 12%
  • Undergraduate loan repayments - 9%
  • Postgraduate loan repayments - 6%

As you may have noticed, those percentages add up to 47%. Under the previous loan proposals they'd have added up to 50%. (Masters loans were originally expected to be repaid at the same 9% rate as undergraduate loans).

But none of this is the same as paying a single 47% (or 50%) deduction from your salary. This is because each of those deductions applies at different levels of income and to different amounts of your salary.

Postgraduate loan repayments themselves only apply to incomes over £21,000.

So, you will only repay at 6% of whatever income you earned over £21,000. Remember, that doesn’t mean that when you earn £21,000 or more you start paying 6% of your total salary in repayments. Nor will your rate of repayment increase in line with your salary.

Whatever you earn, you will only ever repay 6% of the amount over £21,000 as a deduction for your postgraduate loan.

Postgraduate loan repayments - real world examples

In order to understand exactly how much of an effect a postgraduate loan might have on your salary (and how that compares to other common deductions) it’s helpful to look at some ‘real world’ examples.

Please note that these are hypothetical and only include common UK salary deductions such as income tax and national insurance. Information on income tax and National Insurance is based on current projected data for the 2019 financial year (when postgraduate loan repayments will begin).

So, whilst this data is currently accurate and should provide a useful guide to the proportionate cost of a postgraduate loan, the exact amounts for different deductions may differ slightly when you graduate with your Masters.

Example 1 - salary deductions for a Masters graduate earning £20,000 per year

Let's say you finish your Masters and take up your first job, with a starting salary of £20,000. For the sake of simplicity we'll also say that you graduate after April 2019, when loan repayments begin. Perhaps you studied a two year Masters or a part-time course (both are eligible).

Income tax

You're now earning enough to pay income tax. You pay this at 20% of any income above your personal allowance. Based on current projections, this allowance will be £11,000 in 2019.

So that's £11,000 of your £20,000 salary that you don't pay any tax on. And a remaining £9,000 for which you do.

20% of £9,000 is £1,800, which is the amount you'll pay in income tax.

National Insurance contributions

As a UK tax payer you'll also pay employee's National Insurance. This is calculated at 12% of any earnings between £8,060 and £42,385 per year.

So, with an annual salary of £20,000, you'll pay NI on £11,940 of your income.

12% of £11,940 is £1,433 (rounded up to the nearest pound). That's the amount you'll pay in National Insurance contributions.

Undergraduate loan repayments

For the sake of argument we'll say that you took out a student loan for your Bachelors degree as well as your Masters. Normally you'd repay this at a rate of 9%. But that only applies to income over £21,000 per year.

As someone earning £20,000 per year, you won't be deducted anything. So that's precisely £0 in undergraduate loan repayments.

Postgraduate loan repayments

The same applies to your postgraduate Masters loan. You would repay this at 6%, but that only applies over £21,000.

Earning £20,000 per year means that, so far, the repayments for your Masters loan is £0.

Total deductions

So, as someone earning £20,000 per year, you're protected by loan repayment thresholds. You'll start repaying both your undergraduate and postgraduate loans once your salary rises, but, for now, you've got space to take advantage of your degrees whilst getting yourself established.

Your total salary deductions as a Masters graduate earning £20,000 a year are £3,233.

That leaves you with a remaining income of £16,767.

If we put this information into a pie chart, it looks like this:

£20k Repayment Pie Chart

Example 2 - salary deductions for a Masters graduate earning £25,000 per year

With a Masters under your belt you do well at your job and, a few pay-rises later, you're earning £25,000.

This means that you've now crossed the repayment threshold for both of your student loans. But that doesn't necessarily mean they'll be having a significant impact on your salary.

Income tax

First up, you're still paying income tax on income over £11,000. That's a larger amount, having risen to £14,000. But you're still only paying tax on 20% of it.

That figure is £2,800, which is your total deduction for income tax.

National Insurance

Your National Insurance contributions haven't changed either, they just apply to more of your total salary. You're now paying NI on £16,940 (the amount of your £25,000 salary over £8060).

12% of £16,940 is £2,033 (rounded up to the nearest pound) and that's the amount you'll pay in employee's NI contributions.

Undergraduate loan repayments

Now that you're earning over £21,000 you do have to begin repayment for your student loans. But remember that you only do so on income over £21,000, not on your total salary.

You'll repay your loan at a rate of 9% of income over £21,000, which, in your case, is 9% of £4,000.

So that's £360, which is the total annual payment you'll make towards your undergraduate debt.

Postgraduate loan repayments

And, finally, you're now also beginning to pay off your Masters loan. The terms for this are the same as your undergraduate loan, except that the rate has been lowered as part of the finalised scheme.

You'll now only repay your postgraduate loan at 6% of income over £21,000 (not 9%).

So that's 6% of £4,000, which is just £240 - the total annual deduction from your salary in repayment of your Masters loan.

Total deductions

Taken together, these deducations add up to £5,433 (only £600 of which is related to your student loans). This is a bit more than the £3,233 you'd be paying in example 1, but it's still nowhere near 50% (or even 47%) of your salary.

In fact, you'll 'take home' £19,567.

It's easier to visualise this if we put the different amounts into a pie chart:

£25k Repayment Pie Chart

Example 3 - salary deductions for a Masters graduate earning £60,000 per year

You’re several years on from graduation and the advanced knowledge and specialist skills you acquired on your Masters degree have really boosted your career. After some successes and promotions you’re now earning £60,000 a year – well done! So, how much of that is being deducted?

Income tax

You still have your personal allowance of £11,000 tax free. That means you pay income tax on the remaining £49,000 of your income.

However, because you're now earning over £43,00 per year, part of your income is now taxed at a higher rate of 40% (based on projected tax rates for the 2016-17 year).

So, you'll pay 20% tax on income up to £32,000 (the first £43,000 of your salary minus your personal allowance of £11,000). That's £6,400.

You'll also pay 40% on income between £32,000 and £49,000 (the remainder of your salary, minus your personal allowance). That's 40% of £17,000, which is another £6,800

Combined, this gives a figure of £13,200, which is the total amount you'll pay in income tax on a salary of £60,000 per year.

National Insurance

Your employee's National Insurance contributions have also altered as you're now earning above £42,385 per year.

You'll still pay 12% of income between £8,060 and £42,385. That's £4,119. But you'll only pay 2% in NI on earnings over this. So that's 2% of the remaining £17,61, which is £352 (rounded to the nearest pound).

Your total National Insurance contribution is therefore £4,471.

Undergraduate loan repayments

Your income tax and National Insurance deductions may have changed, but your student loan repayments are the same as they were in the previous two examples. You're still only repaying a set percentage of income over £21,000 per year.

So, for your undergraduate loan, that's 9% of £39,000, which is a total annual repayment of £3,510.

Postgraduate loan repayments

It's the same story for your Masters loan, except that you still only repay at 6% of income over £21,000 (rather than the 9% rate for your undergraduate loan).

So that's 6% of £39,000, which is £2,340 - the total repayment cost of a postgraduate loan for someone earning £60,000 per year.

Total deductions

All of these deducations taken together equal £23,521. That's a much larger amount than in the previous examples, but you're also earning a lot more. Crucially, the total cost of both undergraduate and postgraduate loan repayments is only £5,850 per year.

And even with both loans, plus income tax and National Insurance, you'll have a remaining salary of £36,479.

Again, a pie chart makes it clear just how small the loan repayments are, proportionately:

£60k Repayment Pie Chart

Further information

These examples should make it easier to understand the possible effect of a postgraduate loan on your future salary.

It’s absolutely right to think carefully and responsibly about any loan commitments, for any purpose, but – as the above scenarios show – the effect of a postgraduate loan on your future salary is not as substantial as some sources may imply. Hopefully this information helps you make the decision about whether a postgraduate loan is right for you.

If you’d like to learn more generally about the new government funding for taught Masters degrees, check out our complete guide to the uk postgraduate loans scheme. Or, if you’d like to get started looking for your ideal Masters course, you can search thousands of UK Masters programmes at FindAMasters.com.

Please note that, whilst information here is based on official documentation our examples are offered as guidance only. Exact income deductions for different purposes will depend on your own financial circumstances.

Last updated - 24/12/2015

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