How the student loan scheme works Graduates earning £21,000 or less accumulate interest at the rate of RPI inflation only. Or, if you earn between £21,000 and £41,000, you pay interest at RPI plus a margin based on a formula where 0.00015pc is added for every £1 earned. Sound complex? It is. Put another way, your rate goes up by 0.15pc per £1,000 of pre-tax salary. If you earn more than £41,000 you pay RPI plus 3pc, which is the maximum rate. The interest continues accumulating until the loan is paid back in full. It is an employer's job to take graduates" monthly repayments from their salary. If the debt is not repaid in full after 30 years the remainder is written off. Borrowers can repay their loans at any time, free of penalty, if, for instance, they inherit money. The more you earn, the more a loan will cost you How might a student loan work out in practice? Start by assuming he or she borrows the maximum under today's allowances, of £50,000. And then assume that when they graduate and start to work, inflation (as measured by RPI) is, as now, around 3pc. Further, let's assume their wages rise for the duration of your working career at 2pc above inflation. These assumptions are basic and in reality crude - but they give a picture. Take the graduate whose salary starts at £21,000. They do relatively well because although they will make payments for 30 years, their payments will total just £19,700, or about 40pc of their original borrowing. Higher earners pay back more. A starting salary of £25,500, again growing at the same rate, would result in £47,000 being eventually repaid - still less than the original sum borrowed. An initial salary of £36,500 sees the repayments really leap. That is because higher rates of interest are applying to the debt, and compounding up over the years. So this graduate would more or less clear their debt by the end of the 30-year period, having paid £112,000 - over twice the borrowed sum. According to Angus Hanton of think tank Intergenerational Foundation this is because the interest racks up for higher earners at such a rate there will be some years when, despite making the required repayments, their total balance grows. He said the arrangement then becomes more "akin to a tax." For money saving tips and advice: sign up to our weekly email