“I’m starting to research universities and, if I decide to apply, I’m aiming to begin a course in September 2025. I’ve seen that the rules are changing from September 2023 – what is happening and how will it affect me?”
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A number of student loan changes are coming into force from September 2023 with the introduction of a new “Plan 5” repayment scheme.
Under the current Plan 2 system, graduates who still have some student debt outstanding 30 years after finishing university are no longer liable for repayments. The debt – which the government forecasts will average £45,600 for the 2022-23 intake – is written off. Under the new system, this period is being extended to 40 years. This means workers could be paying off their loan for another decade.
The government says it has introduced this reform to ensure value for money for the taxpayer. However, it means some people, mostly mid and lower earners, may still be repaying their debts well into their 60s.
There are other changes, too, with Plan 5. The government is reducing the earnings threshold at which graduates from England become liable to start repaying their loan. This trigger point is currently £27,295. From September, it will fall to £25,000.
However, while this will mean that annual repayments will go up, the interest rate on student loans will be cut to the retail price index (RPI) measure of inflation, instead of the current Plan 2 rate of RPI plus 3%. The government has said this is being done to ensure that borrowers on the new Plan 5 “will not repay more than they originally borrowed over the lifetime of their loans, when adjusted for inflation”.
At the same time, prime minister Rishi Sunak is cracking down on so-called Mickey Mouse degrees. Under proposals, the number of students who universities can recruit onto courses that fail to deliver what the government perceives as “good outcomes” will be capped. Average salaries will be used to calculate the “best value” degrees.
This won’t affect new students from this September, but it may affect those who apply in 2025. It basically means there may be fewer courses to choose from.
Meanwhile, fees for degrees with a foundation year are to be reduced from £9,250 to £5,760. Undergraduate tuition fees will be capped at £9,250 for another two years.
Plan 5 comes into effect this September, and, while it will replace the current system, it could well change again. So it’s important that you keep an eye on any further government changes. Here’s my breakdown of what Plan 5 means for you.
Read more: Student loan repayments: how do they work?
Key student loan changes in 2023
Earlier repayments
Those who started a degree between September 1, 2012 and July 31, 2023 will be on the Plan 2 repayment scheme, under which they have to repay 9% of everything they earn above the threshold of £27,295 a year, £2,274 a month or £524 a week.
However, under Plan 5, the earnings threshold is falling to £25,000, £2,083 and £480, respectively, from August 1, 2023.The 9% repayment rate still applies.
In short, this means more graduates will be paying money back as soon as they start work. To reiterate, the repayment will only apply to the amount they earn over £25,000, not their full salary.
But if you never earn over the threshold, you will still never pay a penny. The £25,000 threshold is frozen until 2027, when it is “planned” to increase with inflation.
Longer repayments
Right now, loans are wiped out 30 years after graduation. This is rising by 10 years to 40, which will mean some graduates pay more over their working lives as long as their earnings exceed the repayment threshold at some point.
To illustrate this, say someone who starts university this summer goes on to earn an average annual salary of £35,000. That is £10,000 more than the £25,000 threshold and repayments will have to be made at 9% of that excess, which works out at £900 a year. Over 30 years, this will come to a total repayment of £27,000; over 40 years, it will be £36,000.
This is still well short of that average student debt of £45,600 – meaning some of the loan will be written off, even after 40 years – but the longer repayment period will have led to an extra £9,000 being spent on settling some of the debt.
It is also the case that only mid to lower earners will pay more as a result of the switch to a 40-year schedule. Take someone on a salary of £45,000: their annual repayments at 9% of the £20,000 in earnings above the threshold will come to £1,800 a year – meaning that if they have a debt of £45,600, their repayments will clear it after about 25 years. In other words, the change from 30 to 40 years will make no difference to them.
Read more: ‘Should I pay off my child’s £50,000 student loan?’
How big will my student loan be?
For September 2023 starters, the full maintenance loan for living costs will be £8,400 if they are living at home, £9,978 if they are away from home outside London, and £13,022 if they are away from home in London.
These figures for maintenance are the maximum loans. If you are under the age of 25, the exact amount you will get will depend on “household income”. This tends to be the income of their parents. If this is under £25,000, you will get the full loan. Over £25,000 and the loan will decrease; the higher the household income, the smaller the loan.
Tuition fees, meanwhile, will be frozen at £9,250 for the next two years.
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Does it make sense for my parents to pay my university fees?
The government says it expects that about 27% of students who started university in 2022, on Plan 2 loans, will repay their debt in full. This figure is rising to 61% for the September 2023 intake because of the earlier and longer repayments.
However, even if the repayments are affordable, they will still be taking a chunk out of your pay, and all the time your student debt will be accruing interest. So, if you have savings or your parents can afford it, should you fund your student fees yourself?
Whether your parents should pay your university fees really depends on whether you expect to earn a good salary and how certain of this you can be.
An important question to ask is how close you think you will get to paying off your loan in full. For a start, you will have to earn £25,000 before you repay anything. After this – assuming that average student debt of £45,600 – you would need to earn an average of about £37,500 over your career to clear it after 40 years.
In other words, those who earn less than this won’t be the hook for at least some of their debt; at the end of the repayment period, both the loan and any interest owed will be wiped.
You can use a student loan calculator to work out how long it would take you to clear the debt.
‘Won’t it save me interest if I become a high earner?‘
If you expect to be a higher earner, and it is possible for you or your family to fund the fees, there is a case for avoiding a student loan to free yourself of interest charges. But this is risky. You may not get the salary you imagined and it may not go up much, or you could have to stop work for a few years. In any of these eventualities, the loan you have forgone might not have been paid off anyway. And that family money could have been invested for you, or put towards the purchase of a property, instead of funding student fees.
One alternative to consider is loan overpayments once you start work. If your salary continues to grow, paying the debt off early could save you a few thousand in interest charges. Again, it’s risky. I weigh up the pros and cons of this here.
Read more: Can I get a student loan to study abroad?
Key points
For those who will rely on student finance to attend university, Plan 5 loans will mean they could be paying back for longer.
Extending the repayment period means many lower and mid-earners will pay for longer, reducing their take-home pay each month, until they reach the 40-year mark.
Higher earners who would clear the debt within the current 30 years anyway are unlikely to be affected.
But while the changes may seem offputting to some, it is still important to consider university. According to government figures, working-age graduates earn £10,000 more on average than non-graduates. Statistically, they have higher employment rates, too.
Read more: How the student loan repayment threshold freeze affects you
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