New student loans to cost many 50% more: Martin Lewis’ 6 need-to-knows about ‘Plan 5’ English student finance
September 2023 will see the biggest shift in student finance for a decade, as new ‘Plan 5’ loans launch for new higher education starters from England. Paradoxically, the changes are both subtle and massive. On the surface it looks like a tweak, in practice it will increase the cost by over 50% for many typical graduates and double it for a few.
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Six things everyone should know
There are more myths and misunderstandings about student finance than any other subject I cover (my polite way of saying there's a lot of bull spoken), as explanations are spun to suit the teller’s politics. And that's just as true of this new system. Yet I've tried to ignore the politics in this guide and focus on the practical financial reality. There are six big points to understand…
1. The student loan price tag can be £60,000, but that's NOT the cost
Tuition fees are capped at £9,250 a year (£9,000 in Wales) until the 2025/26 academic year and most places charge the maximum. Yet you don’t need the cash to pay upfront.
First time UK undergraduates don't usually pay universities or other higher education institutions directly, fees are paid for you by the Student Loans Company. Though the few lucky enough to have the funds to pay upfront can do it without getting a loan (but don’t assume that’s always a winner, see my is it worth taking (all) the Plan 5 loan guide).
For most though, over a typical three-year course, the combined full loan for your tuition, and living costs, can be £60,000+. But that’s not what counts, what matters is what you repay...
- You only repay when you earn over £25,000 a year – earn less and you don’t pay. So if you never earn over the threshold (hopefully that won’t happen), you’d never pay a penny. The £25,000 threshold is frozen until 2027 when it is ‘planned’ to increase with inflation.
As most people are paid monthly, technically you pay 9% above the equivalent £2,083/month (or £480/week). So, if you have an irregular payment, for example a bonus (of say £1,000), you have to pay more (in this case £90) that month. If your total annual earnings are under £25,000 you may be able to reclaim this, but sadly if they’re more then you can’t reclaim any of it.
- You repay 9% of everything earned above the (currently £25,000) threshold. So the more you earn, the more you repay each month...
|£24,000||You don't pay|
|£26,000||£90/year (9% of £1,000)|
|£35,000||£900/year (9% of £10,000)|
|£50,000||£2,250/year (9% of £25,000)|
|£100,000||£6,750/year (9% of £75,000)|
- You only start needing to repay in the April after you leave university. Though Plan 5 loan repayments won’t start until April 2026 at the earliest, so if you were to drop out early, your repayments wouldn’t start until then.
- The loan is automatically WIPED after 40 years (or if you die). Unless you’ve cleared what’s owed earlier, you stop paying 40 years after the April you leave university. This means most will be repaying for a good chunk of their working life.
The debt is also wiped if you die, so it won't be an added burden to your beneficiaries. It's also wiped if you're permanently incapacitated in a way you'll be permanently unfit to work.
- You repay automatically via the payroll, just like income tax. Your employer takes the payment via PAYE (Pay-As-You-Earn) before you get your income, meaning you never need to make payments, therefore you can never miss payments (so no debt collectors).
If you’re self-employed, then just like income tax you pay it through the self-assessment scheme. In which case, do ensure you put enough money aside to cover it (and if you’re likely to be self employed, see my A warning to freelancers and self-employed blog).
- It DOESN’T go on your credit file. Therefore it doesn’t impact your creditworthiness for other applications (though it can be taken into account when working out affordability). See more on student loans and your credit file and will student loans impact your ability to get a mortgage?
- You do still need to repay if you move overseas. I’m often asked this. The student loan is technically a contract, so the fact that you're no longer in the UK doesn't affect that contract.
The rules state you're still obliged to repay 9% of all earnings above the ‘local equivalent’ to £25,000/yr. Not doing so could lead to substantial penalties. And this local equivalent isn't just about exchange rates, it factors in the cost of living in your country – a lower cost of living means a lower threshold – so it can be radically different.
While the repayment thresholds for Plan 5 overseas haven’t been published yet (as you don’t need to start repaying until at least 2026) take a quick scan at Plan 2 overseas repayments and assume the Plan 5 ones will be very roughly 10% lower.
Of course, if you ignore the moral obligation to repay the state for the education it provided you, the real question here isn't "Do I have to?" but "How can they make me?"
Certainly if you temporarily leave the UK and come back having missed some payments, expect to be pursued. If you move abroad permanently, never to return, there may be no attempt to pursue you in a foreign court. But there are no guarantees.
The Government has said it will chase people who move abroad more thoroughly than it has in the past – through 'sanctions' and prosecution. This guide will be updated if and when we learn more about that.
- You can volunteer to overpay if you have more cash. Yet this isn’t a no-brainer, in fact for some it can be a big mistake, see my is it worth taking (all) the Plan 5 loan guide.
Further Quick Q&As on student loans and repaying:
If you already have a higher education qualification, you're unlikely to be able to borrow the money – this is mostly for first time UK undergraduates (including Higher National Diploma/Certificate courses).
The main exception is with teacher training courses, where you can usually get funding even if you already have an undergraduate qualification. For more info, see Gov.uk.
Yes, but only if you have annual income of at least £25,000, within which at least £2,000 comes from savings interest, pensions, or shares and dividends.
If so, this will also be treated as part of your income for repayment purposes. You'll need to repay 9% of that too via self-assessment.
The amount you pay is calculated based on your pre-tax income above £25,000/year, but the money is taken after you've paid tax. For example...
If you earn £35,000 a year gross (pre-tax) salary, you will repay £900 a year. Yet you still pay tax on the entire £35,000 income. You don't get any tax breaks on the fact you're repaying the student loan.
You pay student loan repayments on the same income that your employer pays national insurance contributions on – so before tax and pension contributions are taken out. So, whether your pension scheme uses a net pay arrangement, or relief at source – either way the student loan is taken first. For more info on the different pension types see Pension need-to-knows.
2. There is a, somewhat hidden, official PARENTAL CONTRIBUTION to living costs
All students under 60-years-old, both full and part time (minimum 25% of full study), are eligible for a loan to help with living costs – known as the maintenance loan. Some aged 60 and over, who are full time students, are eligible for partial livings loans.
The living loan amount received is means tested...
- Age 25+: Those aged 25 or over on the first day of the academic year automatically have independent student status, so are assessed on their own (and their co-habiting partner’s if they have one) residual income.
- Under 25: For most under-25s, even though you are old enough to vote, get married and fight for our country, your living loan is dependent on family residual income which for most people is a rough proxy for 'parental income'. This assessment often includes the income of your parent's partner or step parent.
The living loan starts decreasing at (family) income of just £25,000
For 2023 starters, the loan received starts to be gradually reduced the more above £25,000 (family) income you have – less than that, you get the full loan.
For someone who lives away from home to study, it tops out at income of roughly £62,000 (£70,000 in London, £58,000 if you stay at home to study) at which point the student gets the minimum loan – about half the full amount.
'For under 25s, this missing amount is effectively an unsaid, parental contribution – as the only reason you get less is that your family earns more.'
Until recently, no official documents even hinted that parents needed to be aware of this. The lack of clarity caused friction when students arrived at university without enough funds.
I spoke to some whose parents had told them “that’s what you’re given, it’s your job to stand on your own two feet” – not realising their child’s loans were half what others got – because they came from a more affluent home.
For years, MSE and I campaigned about this information deficit, until finally in 2022, one Universities Minister listened. So now the correspondence refers to it a little, but still it’s best to use our Parental Contribution Calculator to find out what the gap is.
For 2023/24 starters, the full loan is £8,400 if living at home, £9,978 living away from home, £13,022 away from home in London. The graph below shows how as your income increases the amount of loan received drops, meaning the gap – the parental contribution – between the full loan and what’s received grows.
What if parents can’t, or won’t, contribute?
Of course, some parents won't be able to afford the contribution. There’s no rule that forces them to pay. If you are under 25, you can apply to be an estranged student which means you'll get independent student status – but many find the criteria tough (though it's automatic if you’re a parent yourself).
At least knowing there is a gap helps students and parents understand what level of funds are needed. And it's important to have this conversation together to work out how you are going to plug the hole, or even where you study.
In fact, the biggest practical complaint I hear from students is that the living loan isn’t big enough. So when deciding where to study, look at all the costs, transport, accommodation (will you get into halls?). And with living loans not rising in line with (or even close to) current high inflation, sadly things are likely to get worse.
The family residual income assessment for under 25s is based on the home you are primarily resident in. If you live with a step-parent or your parent’s partner, their income is taken into account too (though siblings who are earning aren’t included). I’ve met a case where a student had to leave study because their parent’s partner moved in so they went from the full loan to the minimum loan, and simply couldn’t afford it.
Worse, while income is based on the tax year two years before the academic year (so for 2023 starters, it is 2021/22), even if the partner has moved in since then, their income for that year is still assessed. Quite simply this system is unjust and unfair. I have lobbied on it, to little avail.
Five quick Living Loan tips...
You don’t need to wait to have a confirmed place. First time student applicants living in England had a deadline of 19 May to apply and get their living loan guaranteed for the start of the 2023 term. If you missed that, don't worry you can still apply and get the loan, you just may wait longer for it to arrive.
Finance applications are likely to open in March 2024 for September 2024.
The answer is easy for those who are working – don’t spend more than you earn. For students it’s tougher.
My answer is to add up your living loan, any money from parents, grants, and work, and that is your income. Don’t include 0% student overdrafts or other debt as income. Use our student budgeting guide for tips on managing your money while at uni.
Your family income is assessed based on income two tax years before you apply, so for 2023 starters it’s the 2021/22 tax year. If it has dropped substantially (over 15%) since then, you can ask for a current year income (CYI) assessment.
A non-repayable, non-means tested, disabled student allowance (DSAs), is available on top of other student finance to cover costs you have due to a mental health problem, long-term illness or another disability.
How much you get depends on your individual needs and where you're studying – it is not means-tested. The available amounts are per year, except for specialist equipment figures, which cover the entire length of your course.
For full-time undergraduate students for 2023/24, the maximum possible funding is £26,291 a year. It’s not usually paid as cash but instead directly to suppliers who provide the recommended support – whether it’s computers or software, ergonomic equipment, or non-medical helpers, such as mentors or specialist tutors.
Part-time students get pro-rata amounts.
You may also be able to get help with "reasonable costs" for travel (eg, if you have to take a taxi because your disability makes using public transport too difficult). In these situations you'll get the extra it cost you, compared to what it would have cost you if you didn't have a disability.
The DSA Assessment process involves finding a centre and attending an assessment. The process can take several months and should ideally be done before starting university. You can apply for DSAs even if you're not sure which university you're going to.
3. The amount you borrow isn't the key factor as 'Plan 5' loans work more like a graduate tax
This bit is really important to understand, as once you get it – it makes lots of personal finance choices about your loan easier to understand. So take your time.
What you repay each month depends SOLELY on what you earn.
For new 2023 starters, it’s 9% of everything earned above £25,000. So, look at these repayments for a graduate who earns £35,000 (which I’m using for the sake of easy numbers):
So what you owe DOESN'T impact what you repay each year. Instead its main impact is whether you'll clear the borrowing within the 40 years before it wipes or not.
The prediction is under Plan 5 loans, 52% will clear within 40 years (you may want to read my old if students won't repay – who pays? blog). Yet the majority of university leavers will be paying well beyond the old 30-year cut off, and 48% for the full 40 years.
So unless you're likely to be a mid to higher earner, or don’t take the full loan, or are lucky enough to have access to large amounts of spare cash, just ignore the amount you 'owe'.
Instead, in practice what happens is you effectively pay an extra 9% tax on your income for most of your working life. At current rates (excluding National Insurance) for most people...
This doesn't mean it's cheap
This doesn't mean I’m saying it is cheap, far from it, a 9% extra tax burden for many decades is hefty. I’m just trying to explain that in practice, it feels more like and is best to think of it like a tax than a debt (and indeed when you apply for mortgages, its assessed more like you have a higher tax burden than outstanding debt).
In fact I’ve campaigned to rename it a graduate contribution system – which is what other countries call a system similar to ours. (PS: it shouldn’t be called a tax either, as its hypothecated to an individual and enforced by contract.)
Overall though, the more you earn, the more you repay each month, the less you earn the less you repay. So, financially at least, to an extent this is a 'no win, no fee' education.
4. Interest is added, but there's no 'real' cost to it, and not everyone pays it!
The one positive change for new 2023 starters is an interest rate cut. For these loans it will be set at the Retail Price Index (RPI) rate of inflation – in the prior version it was RPI plus up to 3%.
Student loan interest starts on day one. The rate for each new September academic year is usually fixed each year based on RPI for the prior March. Though in exceptional times (like now) if the RPI rate is higher than the ‘prevailing market rate’ – which is ill defined, but roughly equates to typical personal loan rates – the interest will be capped at that (ie below inflation).
In theory, there is no 'real cost' to the interest
Inflation is a measure of how much prices are rising. As the interest rate is set at inflation, in economic terms it is described as having no real cost. So if you borrow an amount of money that would buy 100 shopping trolleys' worth of goods at today's prices, then you only repay enough to buy the same 100 shopping trolleys' worth of goods at future prices.
Therefore your borrowing hasn’t really impacted your purchasing power.
This is a neat theory. In practice though, it’s not perfect. For example, the government has chosen to base the interest on the higher RPI rate of inflation (when it’s money the state pays out it choses the lower CPI rate).
Sadly, this year inflation is very high. So the rate for the 2023/24 year could be as high as 13.5% which was March’s RPI inflation rate. Though currently there’s a prevailing market rate cap of 7.3% in place until November, which will hopefully continue after.
Yet over the life of repaying the loan this high rate should balance itself out with low inflation years – but let’s be straight, it’ll definitely feel crappy to start with.
The interest added ISN’T the same as the interest you actually pay
Student loan statements are sometimes as useful as a chocolate teapot. They risk scaring people into making bad decisions (see MSE’s campaign to redesign student loan statements) by focusing on interest.
Yet the interest added, isn’t always the same as the interest you pay, as this is dictated by your earnings and the fact the loan wipes after 40 years. Some may pay no interest at all. This is crucial to understand as some wrongly try to overpay loans due to misplaced fears of interest they needn't pay. Let me try and explain…
– Lowest earners: never earn over the repayment threshold, so repay nowt at all.
– Lower earners: may pay some or most of what they originally borrowed within the 40 years, yet not enough to repay any interest on top. So loans are interest free.
– Low to middle earners: will repay all their original borrowing, but only some interest added, so their effective interest rate will be less than inflation.
– Mid to high earners: with 52% predicted to clear in full under Plan 5, more people than the previously will pay all the interest (though the interest rates are lower than the previous system).
– Very high starting salaries: will pay all the interest added, yet as they repay far quicker, they pay less interest in total. Think of a Mark Zuckerberg example, earn £1bn in your first year and you’d have cleared the loan in a month, so the interest is negligible.
PS. I know you’re thinking ‘but what counts as a high earner’ or similar? I’m afraid that’s impossible to say. This is about 40 years earnings, so you may start low and end up high or vice-versa, or have lower earnings as you take five years off to be a parent or travel. Yet to try and help it’s predicted 70% of graduates who earn £35,000 by the age of 30 will likely clear the loan in full so pay all the interest.
It has long been a problem that Muslim students who follow Sharia principles and avoid interest have been unable to take student loans. It’s a subject I campaigned on back in 2013 – as without the loans it is purely a question of whether parents can afford it. It looked like it was going to happen, but then fell off the political agenda.
The latest situation is the government said a Sharia compliant alternative student finance product would not be available by 2025, but it remained committed to delivering a product as soon as possible after. Sadly my comment is “I’ve heard that before”.
If you've got the money, should you avoid taking the loan at all?
It's a big decision. Get it wrong and you can pay £10,000s that you didn't need to. So read my full step-by-step is it worth taking (all) the Plan 5 loan guide, which also covers whether it will be worth overpaying later.
5. The cost from 2023 will be substantially higher than for previous generations
Here's my graphic from my ITV show that summarises the key changes:
If you look at this you can see why I opened this guide by saying costs are increasing…
- You repay more on the same earnings than predecessors (£207 a year, every year, more if you earn over the old threshold).
- You repay for longer (the loan wipes after 40 years, not 30).
'The new system leaves many who start university straight after school still repaying it into their 60s. Many typical graduates will pay over 50% more than under the prior system and a few
The only people who gain from the changes, are the highest earning university leavers (roughly top 25%) – who would’ve cleared their loans under the old system. This is because repaying more each year, means you repay quicker, and there’s less interest, thus less repaid in total.
Overall these changes swing the pendulum of cost further towards the individual, away from the state. The Government's own data shows the state's contribution will drop from 44p in the pound to 19p under the new system, meaning the individual pays more, the state less.
A big but (not mine) – this isn’t a reason not to go, if it’s right for you
As daunting as this may feel, the fact University may be more expensive, isn’t a reason not to go if it’s right for you. University isn’t just about the finances. There are many other gains – which will be life-changing for some – and, on average, graduates do earn significantly more than non-graduates, so there is a balance.
Yet the increase in likely cost for many is certainly a reason for you to understand how the finances work, and to examine whether University is the right choice (or could an apprenticeship or another option be better?).
6. The system can change, and has before
Student loan terms should be locked into law, so only an Act of Parliament can negatively change them once you've started uni. Then again I should have a lustrous full head of hair. Sadly neither of these things are true.
And we have previously seen bad retrospective tweaks (to student loan terms, not my hair) though after much campaigning the worst was overturned.
Most of the past changes were about the repayment threshold rather than bigger structural issues, and indeed I would view the repayment threshold as ‘variable’ it can be changed at the whim of administrations.
Yet the fact this new system (eg repaying for longer) only impacts new starters is an example that major systemic retrospective negative changes for individuals are frowned on, thus unlikely, though not impossible. Even so, the last of my need-to-knows has to be the caveat that all this, I hope, correct… 'unless things change'.
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