Postgraduates with student loans often face high effective marginal tax rates, especially if they are also repaying an undergraduate loan. However, it may not always make financial sense to repay these loans early.
Regardless of the type of student loan – plan 1, 2, 4 or 5 – repayment for a normal student loan is at the rate of 9% once earnings exceed an income threshold. Depending on the plan, the threshold is between £24,990 and £31,395 annually.
Repayment of a postgraduate loan is at the rate of 6% once income reaches £21,000. Total student loan repayments could therefore be at a rate of 15%.
Marginal tax rates
An employee who is repaying both a normal and a postgraduate student loan is faced with an effective marginal tax rate of 43%:
- Earn between £50,270 and £100,000, and the rate becomes a hefty 57%.
- However, it gets even worse for those earning between £100,000 and £125,140, with a rate of 77%.
Unearned income is only taken into account if it exceeds £2,000 for the year and with this comes the requirement to submit a self-assessment tax return.
The £2,000 threshold for unearned income is all or nothing, so keeping unearned income within the threshold, or making sure a tax return is not required, will save on student loan repayments.
Repayment
Despite potentially high marginal tax rates, surprisingly, it will often not make financial sense to repay some or all of a student loan early.
For example, Alan, an employee has a doctoral loan of £28,000:
- Based on 2024/25 repayment terms, if Alan earns £35,000, he will repay £840 annually, or £25,200 over 30 years before the balance of the loan is written off.
- If Alan had initially repaid £5,000 of the loan, he probably would still have ended up repaying the same total of £25,200 given the interest rate charged on postgraduate loans is set at RPI plus 3%.
Guidance on repaying student loans can be found here.
For more information, contact us on 01142 664 432 or email info@smh.group.
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