Interest-free student loans sound like an absolute steal, but the reality is that nothing comes free.

When preparing for university, many students are lured by the prospect of what many people refer to as an interest free loan.

But this is a misconception – the Student Loans Company (SLC) does offer students financial loans, but they are certainly not interest free.

Interest on the amount owed is linked to inflation in line with the Retail Prices Index, which for the period of September 2007 to August 2008 stands at 4.8%.

In real terms, the value of the money you pay back should be roughly comparable to the value of the amount borrowed.

With the current base rate standing higher than 4.8%, it would perhaps seem sensible to take out a loan even if you did not think you would need the money immediately. The loan could be invested and gain a higher savings interest rate than the rate at which interest was owed back on the loan.

There are two main types of loan available to students. The first is the maintenance loan, which is the main student loan product for living costs, which everyone is entitled to.

Maximum entitlement is affected by place of residence, (parental home, away from parental home or away from parental home in London), year of course (final or non-final), and entitlement to other financial support, such as NHS bursaries.

The average income contingent maintenance loan was £3,590 in 2006/07, whilst the figure so far for applicants in 2007/08 is similar at £3,560.

Since many universities introduced top-up fees, students have also become entitled to a loan to help them pay their tuition fees. The maximum amount of tuition fee loan available is always the amount of tuition fees charged by the institution or £3,070 (2007/08 figure), whichever is less.

According to figures from SLC from November last year, 420,000 English domiciled students applying in 2007/08 under the 2006/07 entry regulations had applied for a Tuition Fee Loan at an average rate of £2,890 per student.

Clearly there is a large amount of financial assistance available to students, but they must be aware that what has been borrowed in loans for maintenance and tuition, must be paid back, with interest.

However, repayments do not begin until the April after students finish their course, with the amount repayable based on income.

The government threshold is currently a gross income of £15,000 a year. 9% of any income above the threshold is repayable, and automatically gets deducted from your payslip.

If you earn less than the threshold, you will not have to repay anything.

You can of course choose to pay back more than the 9% above threshold, which would mean paying off your loan faster and without so much interest added to your debt.

However, this is not necessarily in everyone's best interest, even if they do have the money to pay it back. It is highly unlikely that you will ever get another loan at a cheaper rate than the SLC offer, but it is likely that you may need another loan in the future, for example a mortgage.

It would therefore be more sensible to keep paying back your debt to the SLC at the lower rate, and use any spare money you might have to help with the higher rate of interest from a further loan.

There is no point paying back money only to borrow more money at a more expensive rate.

The article Student Loan Syndrome originally appeared on 999 Today