Student loans: the basics that apply everywhere

Resources · Cards, loans and credit · 5 min read Building

Key points

• Student loans have rules that vary a lot by country, by lender and by the year you borrowed.
• Interest often builds while you study, so your balance can grow before you’ve repaid a thing.
• Repayments are usually either a fixed schedule or a share of your income.
• Government and private student loans can work very differently.

Two broad kinds of student loans

Government (public) student loans. Plenty of countries offer student loans backed by the government. These often have features normal loans don’t, like repayments tied to your income, pauses when you’re earning very little, or a balance that might be cancelled after a long time. The details depend entirely on the country and the scheme.

Private student loans. These come from banks or other lenders, and they tend to behave like a standard personal loan. A set interest rate, a set term, fixed payments. They may give you fewer protections if your income drops, so check the terms.

Not sure which one you’ve got? Your loan documents or the scheme’s official website will tell you.

How repayments are set

Income-linked repayment

In some systems, you repay a percentage of your income once it goes past a set threshold. Earn under the threshold and you may repay nothing. Earn more and your repayments go up with it. In some places it’s taken straight out through the tax or payroll system.

Under this model, your monthly amount depends on your pay. Not on how big the loan is.

Fixed-schedule repayment

Other systems, and most private loans, have you repay a set amount every month over a fixed term, just like a personal loan. Some schemes offer income-based options alongside the standard schedule.

Some countries mix the two. Thresholds, percentages and terms also change from time to time. So the rules that count are the current ones for your scheme.

Interest while you study

A lot of student loans charge interest from the day the money is paid out, even while you’re still at uni or college. If you’re not paying that interest, it usually gets added to the balance. That’s called capitalisation, and it means you end up paying interest on interest later.

Some loans give you a grace period after you finish before repayments kick in. Interest may or may not keep building during it. Check.

Some government schemes adjust the balance in line with inflation instead of charging a traditional interest rate. The effect is much the same. The balance grows.

A worked example

This one uses a fixed-schedule loan. The assumptions:

• Balance: $20,000
• Interest rate: 6% a year (monthly rate = 6% ÷ 12 = 0.5%)
• A 12-month period before repayments start, with interest added to the balance monthly
• Then 10 years (120 monthly payments)
• The last payment is whatever clears the balance

Option A: let the interest build. After 12 months, the balance has grown to $21,233.56. Repaying that over 10 years costs $235.74 a month. Total paid: $28,288.15.

Option B: pay the interest during the 12 months. That’s $100.00 a month for a year ($1,200.00), so the balance stays at $20,000. Repaying over 10 years costs $222.04 a month. Total paid, including the $1,200: $27,845.02.

In this example, paying the interest early saves $443.13 and drops the monthly payment by $13.70. The same maths works in any currency.

Not everyone has spare cash while they’re studying, and income-linked loans can work quite differently. This is just here so you can see how interest builds.

Questions to answer about your own loan

Dig out your paperwork and find out:

1. Is it a government loan or a private loan?
2. Is interest charged while I study, and is it added to the balance?
3. Is repayment fixed, or linked to my income?
4. What happens if I lose my job or my income drops?
5. Can I make extra payments without a fee?
6. Does any part of the balance get cancelled after a certain time?

Those answers decide how the loan fits with everything else you owe.

Where student loans sit among other debts

Student loans often have lower rates and more flexible terms than credit cards or personal loans. An income-linked loan can even behave less like a debt and more like an extra tax on what you earn above the threshold.

That’s why some people point their extra payments at higher-cost debts first. Others would rather clear the student loan early for the peace of mind. Neither is wrong. It depends on your loan’s rate and rules, and on what matters to you.

If student loan repayments plus your other bills are getting hard to cover, free debt help is confidential and costs nothing.

Common questions

Do student loans charge interest while you study?

Many do, starting the day the money is paid out. If you’re not paying it, the interest usually gets added to the balance.

How are student loan repayments worked out?

That depends on the scheme. Some take a percentage of your income above a threshold. Others use a fixed monthly amount over a set term, like a personal loan.

Should I pay off my student loan early?

Some people put extra payments toward higher-cost debts first. Others clear the student loan early for peace of mind. It depends on your loan’s rate and rules.

Try it

If your loan has fixed repayments, try your numbers in the loan repayment calculator. To see your student loan alongside your other debts, find your Freedom Date.

General information only, not financial advice. Your situation is your own.