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Student Loans Plan 5
Plan 5 student loans
From September 2023, Plan 5 student loans replace the Plan 2 student loans. Plan 5 loans come with a number of significant changes impacting the duration of the loan term and amount repaid.
Changes
One of the most significant changes is the repayment period. Plan 5 loans have a maximum repayment period of 40 years, compared to Plan 2’s 30-year period. Additionally, the repayment threshold for Plan 5 loans is £25,000, compared to Plan 2’s threshold of £27,295. The interest rate for Plan 5 loans is lower than Plan 2, with interest charged at the retail price index rate (RPI), whereas Plan 2 loans incur RPI plus 3% interest.
| Loans | Interest rate | Repayment period | Threshold |
|---|---|---|---|
| PLAN 5 – from August 2023 | RPI | 40 years | £25,000 |
| PLAN 2 | RPI + 3% | 30 years | £27,295 |
Student loan repayments
How do student loan repayments work? Once your salary exceeds the repayment threshold, you will make payments of 9% on the part of your salary that exceeds the threshold. The payment percentage remains the same for both loan types at 9% of earnings over the repayment threshold. Employers will deduct your repayments from your salary along with income tax and national insurance deductions.
On an annual salary of £30,000, the loan repayments on Plan 5 will be £450, while under Plan 2 the annual loan payment is £243. The Plan 5 threshold is frozen at £25,000 until 2026/27 and the threshold on Plan 2 loans is frozen until 2024/25.
Under Plan 5 loans, it is estimated that 52% of students will repay their loans, while the remaining 48% will have their loans written off after 40 years. Higher earners are more likely to pay off their loans, while average to lower earners may not.
| Loan Plan | Salary | Threshold | Excess salary | Repayment |
|---|---|---|---|---|
| Plan 5 | £30,000 | £25,000 | £5,000 | £450 |
| Plan 2 | £30,000 | £27,295 | £2,705 | £243 |
Fees and maintenance loans
Student loans cover university fees, which are up to a maximum of £9,250 per year. Students can also take a maintenance loan for living costs, which is means tested on household income. What is means testing? Basically the more your parents earn, the less you will receive as a maintenance grant. The expectation by the government is that higher earning parents will contribute towards the living costs of their children while at university.
Other implications
While student loans do impact mortgage applications, they are not viewed as debt but are considered for affordability. And finally, it’s important to note that there is no guarantee that loan terms won’t change in the future.
For more information on student loans and details of degree apprenticeships, check out the student loan page and have a look at the following article:
Plan 5 student loans (moneysavingexpert.com)
Student loan calculator
Check out our student loan repayment calculator:
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