Student loan repayments to drop for many Scots by £500/yr from April
Many Scots with student loans will see repayments drop sharply next month, as the income threshold at which loans begin to be repaid will rise from £19,390 to £25,000. We've full analysis of the changes below - including who's likely to pay more and less in the long run as a result.
Currently, there are three types of undergraduate student loan:
- Plan 1, which is for students from England and Wales who started university between 1998-2011, plus Northern Ireland and Scottish students since 1998.
- Plan 2, which is for students from England and Wales who started university from 2012 onwards.
- Pre-1998 'mortgage style' loans, which is for students who started university before 1998.
This change affects all Scottish students on a Plan 1 loan - they will all now be moved to a brand-new Plan 4 loan. The only difference between a Plan 1 loan and a Plan 4 loan currently, is the repayment threshold (the annual salary at which student loans begin to be repaid) which will be set at £25,000/year on Plan 4.
While it's not clear exactly how many Scots will be affected by the change, it's likely to be 100,000s, given around 25,000 students from Scotland go to university each year. You can't reject the new terms. The Scottish Government says the change is taking place to meet a commitment by ministers to increase the student loan repayment threshold to £25,000/year. See our Student Loans Mythbusting guide for more on how loans work.
From 6 April, you'll repay the same amount or less each month
As MoneySavingExpert.com founder Martin Lewis recently explained on his TV show, it's what you earn, not how much you've borrowed, that counts when it comes to student loan repayments. Currently, you repay 9% of the amount you earn over the repayment threshold - and this will remain the case from 6 April.
Yet as the repayment threshold is going up, that means many Scots will pay less. Our table below shows how repayments will change based on various example salaries, but in a nutshell, if you earn up to £19,390/yr there'll be no change to what you repay each month, and if you earn £25,000/yr or more, you'll repay £504.90/yr less. If you earn between £19,390/yr and £25,000/yr, then you'll currently repay some of your loan each month and this will reduce to zero - so the reduction in what you repay monthly will be somewhere between zero and £504.90.
|Salary||Annual repayments until 5 April 2021||Annual repayments from 6 April 2021|
Many will repay more in the long run - but may still be better off overall
While in the short-term the impact of this change is straightforward - some will repay the same each month as before, others will repay less - the long-term implications are more complex:
- Some WON'T clear their loan in 30 years - if so, this change means you'll repay less overall too. Scottish student loans are written off after 30 years. And as what you repay depends on your income, some will never repay their loan in full. If you don't, then all other things being equal, repaying less now means you'll repay less overall too.
- Many WILL repay their loan in full and so may pay more overall - but it's complicated. Student loans in Scotland are typically much smaller than those in England due to lower tuition fees, which in turns means Scottish students are more likely to repay in full over the lifetime of the loan. If we look at the loan in isolation then, this change may cost you more - but there are other key factors to consider:
- Repaying less now means you'll have more money in your pocket now at a key time in your life. This may be useful when taking out mortgages or car loans, for example - as you'll have more disposable income, you may need to borrow less which can mean big savings.
- The interest rate on the loans is extremely low compared to other loans. Currently it's just 1.1% - much cheaper than other borrowing. So if having more cash available now means you need to borrow less elsewhere, again you'll likely save.
- Repaying less of your loan now means you can focus on repaying other debts. These will likely be much more expensive, accruing interest at a much higher rate than 1.1%.
For all these reasons, even if repaying less now means repaying more overall, you may still end up better off as a result.
The switch to a Plan 4 loan should happen automatically - but check
If you're a Scot with a Plan 1 loan currently, then you should automatically be moved to a Plan 4 loan on 6 April. But it's worth monitoring your payslips after 6 April to make sure it's actually happened - as we revealed last year, UK-wide more than 100,000 overpaid student loans in 2020 because they were on the WRONG payment plan.
If in April you're concerned that you may not have been switched to a Plan 4 loan when you were supposed to be, check with your employer or the Student Loans Company.
Scottish students who took out loans prior to 1998 are unaffected
Scottish undergraduate students who took out student loans prior to 1998 aren't on Plan 1 loans and so won't be moved to the new Plan 4 style loans. They'll instead continue to repay loans under the different system which is currently in place, known as a 'mortgage-style' loan.
Repayment thresholds are also rising a bit for those from elsewhere in the UK
Repayment thresholds for many students from other parts of the UK are also rising on 6 April, though by much less than is the case in Scotland:
- Plan 2 loans (undergraduate students from England and Wales that started from 2012 onwards): The repayment threshold will increase from £26,575/year to £27,295/year.
- Plan 1 loans (undergraduate students from England and Wales that started 1998-2011, plus Northern Ireland students since 1998 - though not Scots as they're affected by the changes above): The repayment threshold will increase from £19,390/yr to £19,895/yr.
- Postgraduate loans (England): the threshold will remain at £21,000/yr.
Pre-1998 student loans operate on a different system and are known as 'mortgage-style' loans. These loans have been sold by the Government and bought by private companies, such as Erudio. They aren't serviced by the Student Loans Company.