Starting from August 2023, students embarking on their undergraduate degrees can expect significant changes to their student loans with the introduction of the new ‘Plan 5.’ Under this plan, students will repay more than double the amount of previous years, making their lifetime loan repayments much higher. Graduates will begin repaying their loans at a lower salary threshold of £25,000 per year, compared to the previous threshold of £27,295 for students between 2012 and 2022.
Furthermore, students who enroll in university this year will be burdened with loan repayments for an additional 10 years. The remaining balance of their loans will now be cancelled after 40 years, compared to the previous 30-year cancellation period. This means that graduates earning an average salary of £33,000 can expect to repay a total of £38,800, in contrast to the £15,120 for those in previous years with the same salary. According to Save the Student, those under the new Plan 5 system will pay £60 per month to the Student Loans Company if they earn the average salary, whereas students under the old system would pay nearly a third less.
The impact of the changes will be even more profound for those with lower salaries. Previously, someone earning £27,500 would only repay £1 per month, whereas under Plan 5, they would now pay £18.
To understand how student loans work, we need to look at the tuition fee loan and the maintenance loan. The tuition fee loan is transferred directly from the Student Loans Company to the university, while the maintenance loan is deposited into the student’s bank account. With tuition fees capped at £9,250 per year and additional maintenance loans calculated based on household income, the average student will accumulate around £33,000 in debt during their time at university.
Upon graduation, students will be required to repay 9% of their income each month once they earn over £25,000. This income threshold will remain frozen until 2027. The interest on the loan for this year is charged at a rate of 7.1%. After 40 years, any remaining balance is wiped. However, since the loan balance keeps increasing over time, it becomes less likely to be fully repaid. Interest is charged from the moment the loan is taken out and the rate is usually based on the Retail Price Index.
Tom Allingham from Save the Student criticizes the Plan 5 changes as “incredibly regressive,” stating that the highest earning graduates will repay less than under the old system due to their ability to clear the loan quicker and pay less interest. He expresses concern that these changes may discourage prospective students from attending university. A spokesperson from the Department for Education defends the changes, claiming a need for a sustainable and fair student finance system that benefits students and taxpayers.
In addition to the loan changes, it has been discovered that maintenance loans no longer cover the living costs of students in any UK city. On average, there is a gap of £788 per month between the government-provided maintenance loans and actual living costs. As a result, nearly half of UK students find themselves running out of money before the semester ends. This issue is intensified by rising inflation, which further drives up students’ costs.
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