This September sees sweeping changes to the student loans system in England, in response to the 2019 independent Augar review of higher education and funding. We look at what these plans mean for students, graduates, and the taxpayer.
 
Published September 2023

 
New Plan 5 loans will be introduced for undergraduates from England starting their degree this academic year, with changes to the income threshold when repayments start, interest rate, and the term of the loan. For a typical graduate, the cost will be over 50% higher than the previous Plan 2 system*.

* People who started their degree in England between September 1 2012 to July 31 2023 would be on the Plan 2 repayment scheme. For more details and other parts of the UK, see What student loan plan am I on? – Money Saving Expert
 
Note: While Plan 5 replaces the current system, things may well change again! So, do stay aware of any further government changes.
 

Key changes at a glance

 
Plan 5 loans come into effect in England for people starting their degree from 1st August 2023:

• The earnings threshold at which graduates must start paying back their loan is £25,000, until 2026-27 (reduced from the previous repayment threshold of £27,295).

 

• Repayments will continue for 40 years (up from 30) before any remaining debt is written off.

 

• The student loan interest rate will be cut to the Retail Prices Index (RPI rate of inflation).

 

• Undergraduate tuition fees will remain capped at £9,250 for a further two years. (Most places charge the maximum.)

Benefits for the Government & taxpayers

 
The reforms aim to stem the rising cost of student loans, shifting much of the burden away from taxpayers onto graduates.
 
According to the IFS (Institute for Fiscal Studies), under a quarter (23%) of graduates currently repay their loans in full, but this figure is  expected to reach 52% under the new system, with many people paying for their degree throughout their working lives.
 
From a different angle, Government data shows that on average, under the current system graduates pay back 56p of every £1 borrowed, with the state contributing 44p. Under the new plan, graduates will repay 81p in the pound and the state’s contribution falls to 19p.
 
The reforms will bring massive savings for the Government (and taxpayer), estimated at £2.3bn per university cohort. However, they have been widely criticised for benefiting high-earning graduates, whilst heavily penalising lower earners.
 

What do the changes mean for students & graduates?

 
The lower threshold means you repay more per year on the same earnings than graduates on Plan 2 (+£207/year).
And you repay for longer (the loan is written off after 40 years instead of 30).
 
The combined effect of the lower threshold and extended payback period means most graduates will be repaying their loan until they retire. And a university education will cost thousands more than it has done to date.
 

 
In this section, we look at the individual elements and their overall impact.
 

Student loans repayment threshold lowered to £25,000 (until 2026-27)

Graduates under the previous Plan 2 won’t start repayments until they earn £27,295 a year (or £2,274 a month or £524 a week) before tax.  And, if your income drops below this threshold in any year, you can stop repayments. You pay back 9% of everything you earn above the threshold, until your debt is cleared or written off.
But Plan 5 has a lower threshold of £25,000 (£2,083/month, £480/week), meaning annual repayments (for the same income) will be higher (+ £207/year).
 

Example for a graduate earning £30,000:

Plan 2:  9% of earnings over £27,295 = £243 a year

Plan 5:  9% of earnings over £25,000 = £450 a year

 
The £25,000 threshold is frozen until 2027, when the Government plans to link it to inflation (rather than to average earnings, as today).  According to the IFS, once the repayment threshold is indexed to inflation from 2027, it will rise more slowly than when it was linked to average earnings. Keeping the threshold down will mean higher annual repayments for all borrowers, including current graduates on Plan 2. The change will hit lower and middle-earning graduates hardest because they continue paying off their loan for longer.

Extension of repayment term from 30 to 40 years

Under the current Plan 2 system, any unpaid student debts are wiped 30 years after graduation, and only the highest earners will repay their total loan within this period. (The government estimates the average debt for the 2022-23 student intake will be £45,600).
 
However, students starting university from August 2023, will face an extended 40-year payback term. As a result, most lower and middle-earners will continue paying back their loans plus interest for an extra 10 years, reducing monthly take-home pay, and adding £1,000s to the overall cost. (This will not impact high earners who would clear their debt within 30 years anyway).
 

Example of a graduate earning an average annual salary of £35,000:
They repay 9% of earnings above the threshold: (£35,000 – £25,000 = £10,000 x 9% = £900 a year).
Over 30 years, their total repayment would be £27,000.
Over 40 years, it comes to £36,000.
The longer repayment period means the graduate will pay an additional £9,000 towards their debt.

 
It is estimated that just under half (48%) of graduates will be paying off their debt for the full 40 years.
You can use a student loan calculator to work out how long it would take you to clear your debt.

Interest rate will be cut to the Retail Price Index (RPI) measure of inflation

Under the previous Plan 2, your student loan accrues interest at RPI + 3% while you are at university. After graduation, you are charged interest on your outstanding loan, on a sliding scale according to your income (ranging from RPI up to RPI + 3%).
 
For Plan 5, reducing the interest rate to equal inflation is a welcome change, as it means that graduates will no longer repay more than they borrowed in real terms. The change will benefit mid to high-earning graduates, who are the only people likely to pay back the original sum borrowed plus all the added interest, before the write-off deadline.
 
NOTE: As inflation is currently running high, the Government has temporarily capped the interest rate for all students and graduates at 7.3% (September 2023).

Overall impact of the changes

Experts say the new plans will benefit high earners, while substantially increasing the cost of loans for lower earning graduates.
 
High earners (roughly the top 25%) will face lower costs than they do currently. They would have repaid their total loan before the previous 30-year write-off deadline anyway.  So, under the new plans, they will pay off a higher annual amount, clearing their debt faster, incurring less interest (at a lower rate) and therefore reducing the total sum they repay.
 
Lowest earners with an annual income below the repayment threshold will not be affected by the changes, as they will not repay their loan.
 
Low to middle earners: The combined effect of a lower threshold and extended repayment term means most graduates will be paying back their loans plus interest into their 60’s, adding an extra £28,000 to the overall cost. And the wider financial impact of spending more on student loans for a longer period, is that these graduates will have less disposable income to put into savings or investments, contribute to their pension, or pay off a mortgage.
 

 
“Someone with a loan of £45,000 on a starting salary of £30,000 would pay off almost £31,000 under the current system, but that would rise by £40,000 to £71,500 under the new system.

“What’s more, assuming they leave university at the age of 21, they will be paying off £320 a month in their final year of the loan at the age of 61.”

Laura Suter, Head of personal finance at AJ Bell
Source: iNews – Education

 

 
Martin Lewis, Founder of MoneySavingExpert commented:
“It effectively completes the transformation of student ‘loans’, for most, into a working-life-long graduate tax.”
 

Find out more:

Student Loan repayment guide 2023 – Save The Student

Student loans – the lowdown
The current system explained: what, when & how you repay, what interest is charged on your loan and other need-to-knows

 
Sources:

Money Saving Expert – New student loans to cost many 50% more: Martin Lewis’ 6 need-to-knows about ‘Plan 5’ English student finance
The Times Money Mentor – ‘How will new student loan changes from September affect me?’
The Guardian – Student loan changes hit lower earners harder than first thought – IFS
Money Saving Expert – Martin Lewis: ‘This is a big increase to the cost of uni’ – Government makes sweeping reforms to the student loan system in England
iNews – Education: Student loan repayment changes explained: How the lower threshold affects how much you will pay back
The Guardian – Students in England to pay back loans over 40 years instead of 30
 iNews – Education: Student loan repayment: Graduates on low and middle incomes to lose more than £15,000 due to threshold changes
GOV.UK – Fairer higher education system for students and taxpayers