A new regulation which will see the repayment threshold for post-2012 student loans raised to £25,000/year and then increase annually in line with changes to average earnings will come into force next month.
The Government is making a number of amendments to how university leavers repay their loans, and while the key changes were first announced by the Prime Minister last October following a long-running MoneySavingExpert.com campaign, this week is the first time we've seen the detail of the plans as they will be set out in law.
The changes are laid out in what's known in parliamentary jargon as a 'statutory instrument', which allows regulations to be put into law without the need for an Act of Parliament to be passed. The – deep breath – Education (Student Loans) (Repayment) (Amendment) Regulations 2018 will officially come into law on 6 April.
For full help on how repayments work, see our Student Loans Mythbusting guide.
How are the student loan repayment rules changing?
Here's a summary of exactly what's happening from 6 April:
- Started uni in or after 2012 and from England or Wales? Your repayment threshold is rising to £25,000/yr – so many will pay LESS back each month. The repayment threshold – the amount graduates can earn before making repayments – will rise from £21,000/yr to £25,000/yr from 6 April for those with 'Plan 2 loans', ie, those who started uni in or after 2012 and are from England or Wales.
You pay back 9% of the amount you earn each year which is over the repayment threshold. For example, currently if you earn £26,000/yr you'll be paying back 9% of £5,000, so £450. From April, you'll repay 9% of £1,000, so just £90 a year.
- The repayment threshold will change each year based on how average earnings change – and if earnings FALL, the threshold could too. The repayment threshold won't stay at £25,000/yr – it will be adjusted annually in line with changes in average earnings, based on data from the Office for National Statistics. We knew this was happening – however, we now also have confirmation that in the unlikely event average earnings go DOWN, the repayment threshold will too... in which case you'd repay more.
- The thresholds for interest will also be rising - so some will accrue LESS interest. Student loan interest rates are based on the Retail Prices Index measure of inflation (the rate at which prices rise). While studying, until the April following graduation, you're charged RPI + 3%. After that, it depends on your annual earnings – and the thresholds for this are changing from 6 April.
- Currently the interest rate is RPI if you earn under £21,000/yr. From 6 April, it will be RPI if you earn under £25,000/yr.
- Currently the interest rate is RPI + 3% if you earn over £41,000/yr or more. From 6 April, it will be RPI + 3% if you earn £45,000/yr or more.
- Between the lower and upper thresholds, the interest rises gradually from RPI to RPI + 3%. For example, currently if you earn £31,000/yr your rate will be RPI + 1.5%, though since the thresholds are rising, that rate will drop somewhat from 6 April.
- Started uni between 1998 and 2012, or at any time and from Scotland or Northern Ireland? Your repayment threshold is rising to £18,330. The repayment threshold – the amount graduates can earn before making repayments – will rise from £17,775/yr to £18,330/yr from 6 April for those with 'Plan 1 loans'. You pay back 9% of the amount you earn each year which is over the repayment threshold so currently if you earn £18,430/yr, you'll currently repay £58.95, but from April, you'll repay just £9 a year.
- If you have a 'Plan 1' and a 'Plan 2' loan and earn more than £21,000/yr, MORE of what you repay will go towards the 'Plan 1' loan. OK, here's where it gets really technical...
If you started uni in or after 2012 and are from England or Wales, you'll have a Plan 2 loan. If you started uni between 1998 and 2012, or since 2012 and you're from Scotland or Northern Ireland, you'll have a Plan 1 loan. Some people however have BOTH – this might be the case for example if you are English, completed a year of university back in 2009, then dropped out and started a new course in 2013.
The repayment threshold for Plan 1 loans is £17,775/yr and for Plan 2 loans it's £21,000/yr currently (rising to £25,000/yr next month). So:
- Right now if you earn more than £21,000/yr your repayment is spread across your Plan 1 and Plan 2 loans. You pay 9% of everything you earn between £17,775 and £21,000 towards your Plan 1 loan, and 9% of everything you earn over £21,000 towards your Plan 2 loan.
- From 6 April, when the repayment thresholds increase, you'll pay 9% of everything you earn between £18,330/yr and £25,000/yr towards your Plan 1 loan, and 9% of everything you earn over £25,000/yr towards your Plan 2 loan.
- What this means in practice is that if you earn more than £21,000/yr, while the total amount you repay each month won't change, more of what you repay will go towards your Plan 1 loan.
- As Plan 1 loans have a lower level of interest than Plan 2 loans, this COULD mean you end up having to repay more overall – though remember, most won't ever finish repaying the full amount before the loan's wiped.