Student Loans Are Changing

Nora Blackie
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You may have heard the news that people heading to university this September will have a new student loan plan. The new changes to the system are introduced by the Government in the form of new “Plan 5” loans. These new loans have 3 major changes to them, the amount graduates pay back, the repayment threshold, and the annual interest rates.

But how does this compare to the current student loans and, if you’re heading to university this summer, what are the three major student finance changes you should know about?

 

Who falls under these student loan plans?

“Plan 2” –

  • an English or Welsh student who started an undergraduate university course anywhere in the UK between 1 September 2012 and 31 July 2023
  • an EU student who started an undergraduate course in England between 1 September 2012 and 31 July 2023
  • an EU student who started an undergraduate course in Wales on or after 1 September 2012
  • someone who took out an Advanced Learner Loan between 1 August 2013 and 31 July 2023
  • someone who took out a Higher Education Short Course Loan on or after 1 September 2022

“Plan 5” –

  • an English student who started an undergraduate course anywhere in the UK on or after 1 August 2023
  • an EU student who started an undergraduate course in England on or after 1 August 2023
  • someone who took out an Advanced Learner Loan on or after 1 August 2023

 

How do they differ?

1. Student loan repayment threshold will fall

Graduating students, under Plan 2 student loans, currently, pay back 9% of their salary on anything beyond £27,295. Under the new Plan 5 loans, Students will begin paying loan repayments at a lower threshold of £25,000.

For instance:

Repayments for a recent graduate with a Plan 2 student loan are £243.45 per year once they earn £27,295. But a graduate taking out a new Plan 5 loan and making the same salary would pay back £450 a year instead.

 

2. Student finance repayment changes for graduates

Most students don’t pay off their student loans. Instead, any outstanding debt is written off after a number of years. One important difference for incoming students is that they will have an additional ten years to repay their loans.

Currently, graduates with Plan 2 loans have their student debt written off after 30 years with the 30-year clock beginning the April following their graduation. However, this repayment time will be increased to 40 years for graduates who took out the new Plan 5 loans.

For instance:

If you graduated at the age of 21 with a Plan 2 loan, your loan would be written off at the age of 51.

But if you graduated at the same age with a Plan 5 loan, your loan would be written off at 61 instead. This means that new students will be making repayments for most, if not all, of their working lives.

 

3. The annual interest rate will fall

Graduates who have Plan 2 loans are currently charged an annual interest rate that is based on the retail prices index (RPI), plus an additional 3%.

RPI is a measure of inflation that is used to calculate the cost of living and wage escalation. The measurements are made by recording the essential goods and services people are expected to buy, and recording how much the prices are going up or down. This can then be compared to salaries to make sure people are being paid a living wage.

For brand-new Plan 5 loans, however, the interest rate will just be based on RPI, eliminating the additional 3% fee.

As a result, Plan 5 loans will be more affordable than Plan 2 loans.

 

Overall, if you have already started university there isn’t any need to worry as your loans won’t be changing, however, it’s always good to stay updated with new Government developments. Especially, as these new loan plans are making people consider the value of a degree more closely, as Plan 5 students will be paying their degrees back for most of their working lives, almost like a graduate tax. For many, a degree adds so much value and increases their earning potential where the repayments are worth it but with the lower repayment threshold, it may not be as feasible and accessible for everyone as it once was.