Around 55,000 graduates in the UK overpaid their student loans in the 2019/2020 financial year according to recently released data. Why are such a large number of former students overpaying their student loans? And more importantly, what can you do to avoid becoming one of these unfortunate individuals?
We take a look.
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Student loans: how do they work?
Many students in the UK are entitled to borrow money to help pay for university tuition fees and living expenses. Those who have a disability, children, or who come from low-income families may be eligible for additional funds on top of these student loans.
You begin repaying your loan once you have completed your education and are earning an amount that exceeds the repayment threshold.
Student loans overpayment: how big is the problem?
According to the Student Loans Company (SLC), 54,516 graduates made overpayments on their student loans in 2019/2020. The stats show that a total of £23.1 million was overpaid. The average overpayment for each graduate was £424.
However, the average amount overpaid has dropped 30% in the past four years, with the number of people affected dropping by 38% after the Student Loans Company changed its system.
Why are so many graduates overpaying their student loans?
Massive overpayments in previous years owed much to the fact that repayments are made through PAYE and until April 2019, HMRC only sent the Student Loans Company details of repayments once a year. So in the gap between repaying in full and sending the data, millions of people overpaid.
However, things have changed since April 2019.
HMRC started sending loan information reported by employees on a weekly basis. For those who get their salaries monthly through the PAYE system, HMRC sends the information on student loan deductions monthly.
Despite this, many people continue to overpay. According to Sarah Coles, personal finance analyst at Hagreaves Lansdown, the problem stems from five mistakes, which she says frequently cause graduates to overpay:
- Ignoring messages from the Student Loans Company about the direct debit scheme.
- Not keeping contact details up to date with the Student Loans Company. This means they might miss messages about how to avoid overpaying.
- Ignoring messages asking them to repay the total balance.
- Not signing up to the Online Repayment Service, which actually allows loanees to check whether they’ve overpaid and need to request a refund.
- Not updating the bank details held by the Student Loans Company, so the overpayments can’t be automatically refunded.
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How can you avoid overpaying your loan?
The easiest way to avoid paying too much, according to Sarah Coles, is by setting up a direct debt at some point in the final two years of the loan term.
The Student Loans Company will write to you a year before your balance is due to be repaid, inviting you to join the scheme. They will then send you follow-up emails and texts.
The advantage of this scheme is that debits automatically stop once your loan is repaid. Joining it could saving you hundreds of pounds in overpayments.
Unfortunately, only a small percentage of people (21%) sign up for the direct debit scheme.
How can you request a refund if you’ve overpaid?
If you have overpaid, the Student Loans Company will automatically refund you anything up to £750 to the bank account it has on file, if it is current. Unfortunately, if they have an old account on file, they will be unable to do so.
If your overpayment is £25 or less, you can contact the company on 0300 100 0611 and request a refund. If you don’t do this, the company will write off the overpayment.
What can you do once you’ve paid off your loan?
As for what to do with the amount that you are no longer losing on loan repayments, it would be easy to just absorb it into your regular expenses. However, a better option is to save it.
If you don’t miss the money that’s been paying off your loan, why not keep up the habit but use it elsewhere? According to Sarah Coles, “if on the first available month you set up a direct debit of the same sum into savings, you can build a nest egg without noticing.”
