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'Plan 5' student loans
How they work if you're English and starting uni from 2023
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Repaying 'Plan 2' loans
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It depends where you're from and when you started uni
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Student loans: England (2012-22)
Everything you need to know about 'Plan 2' student finance
Updated 1 September 2023
Ignore newspaper headlines about students leaving university with £60,000 of debt. That's mostly a meaningless figure. What counts is how much you'll repay. For some that's far more, for others it's free. This guide is written to bust common myths about how the student loans, grants and finance system works for English students who started uni between 2012 and 2022.
This guide was originally written by Martin Lewis but is now regularly updated by the MSE team.
This is for English students who started uni between 2012-2022. If you reside in England but are starting uni from September 2023 onwards, see 'Plan 5' student loans. Otherwise, see What student loan plan am I on?
Prefer to watch rather than read? See Martin's video below
Note: This talk was recorded in 2019, but the theory behind repaying your loan remains the same. Some of the figures mentioned in this video have changed since the video was made. The following figures are the rates and thresholds for 2023:
- The maximum maintenance loan is now £13,022
- Graduates repay 9% of everything they earn over £27,295
- The rate of inflation is currently 7.3%
- Due to high inflation, the rate of interest was capped at 7.3% in September 2023.
Martin Lewis : Student loans decoded
Embedded YouTube Video
Before we start, I'd just like to say:
For around a quarter of a century, we've educated our youth into debt when they go to university, but never about debt.
It was for this reason, and while no fan of them, when massive changes were announced to student finance for those starting in 2012 or beyond – including the trebling of tuition fees – I agreed to head up a student finance taskforce. The idea was to work with the National Union of Students, universities and colleges to ensure we busted the myths and misunderstandings that resulted from so much political spittle-flying.
For me, what really counts is that no student is wrongly put off going to university thinking they can't afford it. Some may rightly be put off, but unless you understand the true cost, how can you decide?
Thankfully, since then we've also won a separate campaign to get financial education on the senior school National Curriculum in England. Yet it'll be a long time before that truly pays dividends – so there's still a lot of nonsense spoken about student loans.
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Don't confuse the cost and the price tag
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With headlines shouting about £60,000 student debt and that getting bigger as loans for living costs increased in 2017, it's safe to say many students and parents are scared by this huge sum – and worry about how they'll ever repay it.
But in essence that fear is misplaced. That's because the price tag of university is mostly irrelevant. What matters in practical terms is how much you have to repay – and that's a completely separate number from the total amount of tuition fees, maintenance loan and interest.
What you repay solely depends on what you earn after university. In effect, this is (financially at least) a 'no win, no fee' education. Those who earn a lot after graduating or leaving university will repay a lot. Those who don't gain too much financially from going to university will repay little or nothing.
A much more important factor to consider is the hidden expectation of parents contributing financially to their children's living costs while at university.
Many parents aren't aware that they are expected to pick up the slack, which can seriously impact their finances, especially if they've more than one child at university. For that reason, parents should start saving early to ensure they can manage the extra costs.
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You repay 9% of everything earned above £27,295 – earn less and you don't repay
Once you leave university, as long as you haven't taken out a postgraduate loan to complete a master's, you only repay your undergraduate student loan when you're earning above £2,274 a month (equivalent to £27,295/year) and then it's fixed at 9% of everything you earn above that.
Remember, if you take out a postgraduate loan after your undergraduate degree, you pay this back at 6%, as well as repaying your original student loan.
Earnings mean any money from employment or self-employment and, in some cases, earnings from investment and savings.
If you've started repaying the loan, but then lose your job or take a pay cut, your repayments drop accordingly. To labour the point somewhat:
If you earn £28,000 in a year, what do you repay? The answer is £63.45, as £28,000 is £705 above the threshold and 9% of £705 is £63.45.
And if you earn £35,000, what do you repay? The answer is £693.45. £35,000 is £7,705 above the threshold and 9% of that is £693.45.
'How on earth will my child be able to afford to repay these debts if they get a poorly paying job?'
This panicked question has been thrown at me by many parents – and it's really important to examine it in the light of the required repayments.
Someone on a low wage will be required to repay little or nothing at all. In fact, only higher earners will be shelling out large amounts.
It's important to note that not repaying much because you're just over the threshold isn't being bad. The system is, in reality, a graduate contribution, designed so that, in the main, those who gain the most financially out of university contribute the most.
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After 30 years, any and all remaining debt is wiped
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You stop owing either when you've cleared the debt, or when 30 years (from the April after graduation) have passed, whichever comes first. If you never get a job earning over the threshold, it means you won't have repaid a penny.
It's one reason those who are near retirement, who don't have a degree and want one, find it very appealing as unless they've a huge pension, they know they'll never have to repay. -
How much you repay depends on how much you earn
The below table helps demonstrate how repaying your student loan will vary depending on how much you're earning by the time you reach 30. As you can see - in simple terms - the more you earn, the more you'll repay.
Instead of looking at an individual with a specific earnings profile, the table takes into account calculations for a cohort of individuals. This better reflects the uncertainty around lifetime earnings projections, and factors in periods out of work.
As the table shows, the majority of English students who start uni in 2022 and have a salary of £50,000 or less by the time they're 30 WON'T repay their loan in full.
How likely 2022 starters are to repay their student loan
Salary at age 30 Proportion likely to repay in full Average amount repaid £15,000 5% £23,600 £20,000 10% £28,100 £25,000 10% £29,800 £30,000 10% £39,500 £35,000 15% £48,800 £40,000 20% £56,400 £45,000 30% £64,600 £50,000 45% £72,800 £55,000 60% £77,000 £60,000 65% £78,100 £65,000 80% £79,900 £70,000 80% £77,600 All data provided by the Institute for Fiscal Studies (IFS).
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No debt collectors with student loans
All student loans since 1998 have been repaid through the payroll just like income tax. What this means is that once you're working, your employer will deduct the repayments from your salary before you get it. So the amount you receive in your bank account each month already has it removed.
This means that if you're an employee, no debt collectors will come chasing as you don't have a choice in the matter and will have paid it automatically.
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Interest has been capped at 7.3% (for now)
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Don't understand interest rates? Read the Interest Rates guide.
Until 2012 there was no 'real' cost to borrowing money via student loans, as the interest rate was set at the rate of inflation (measured by RPI).
Yet for everyone who started university since the major changes in 2012, that's all changed. The interest is as follows:
- While studying: Usually accrues RPI inflation plus 3% on the outstanding balance. This continues until the first April after graduation, when it changes to...
- After studying, earning under £27,295/year (2023/24): Usually accrues RPI inflation.
After studying, earning £27,295 - £49,130/year (2023/24): The interest rate will gradually rise from RPI to RPI plus up to 3% as you earn more (the interest rises 0.00015% for every extra pound you earn or, put another way, if you earn £1,000 more, you accrue 0.15% extra interest).
After studying, earning over £49,130/year (2023/24): Usually accrues at RPI inflation plus 3%.
It's worth noting all the above scenarios assume inflation is positive (prices rising). It's not yet known what would happen in a period of deflation (prices falling). It's also worth noting that if inflation is above the 'prevailing market rate' - meaning it's costing more than other typical commercial loans - the Government will step in and cap the interest rates students are charged.
The rate you pay changes each September, and uses the previous March's RPI inflation rate.
In March 2022, RPI was at 9%. But as this was unusually high, the Government decided to temporarily cap student loan interest. It's currently 7.3% from 1 September 2023.
In practice, student loans are interest-free for many
I'm no fan of the fact that students aren't just being charged for their education, they also pay for financing it with above-inflation interest.
Yet that's a principled stance. Being charged interest isn't the same as needing to repay it. In practical terms for lots of graduates, especially those who never become high earners, they'll never end up repaying any interest, so it's meaningless.
- While studying: Usually accrues RPI inflation plus 3% on the outstanding balance. This continues until the first April after graduation, when it changes to...
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Get your application in before the deadline to ensure the cash is in your bank when you start
If you're a current English undergraduate returning to university in September 2023, the deadline to submit your student finance application was 23 June.
This is to ensure you get the money in your bank account by the start of your course in September. You can still apply up to nine months after this date, but you aren't guaranteed to have the money by the time you start back at uni, which can make budgeting difficult.
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You can borrow for living costs too, but be warned – for most this is all about your parents' income
Full-time students can take out a loan to pay for their living costs, such as, food, books, accommodation and travel. They're known as maintenance loans, and are usually paid in three termly instalments direct to the student's bank account.
The loan is repaid in exactly the same way as the loan for tuition fees (9% of everything earned above £27,295 in the 2023/24 tax year).
Yet not all is quite as it seems here.
This is because the maintenance loan is means-tested, and the means-tested proportion has increased over recent years from a third to over a half. For almost every student under 25, this means-test is based on household income, which in practice means parents' income. If you're 25 or over, the means-test is based on your co-habiting partner's income (if you have one).
Martin Lewis warns parents about their expected contribution to the student maintenance loanEmbedded YouTube VideoIn England, the maximum loan amount first depends on whether students live at home or go away to study (with an uplift for those studying in London). Within that, for most under-25s the amount is means-tested based on annual family residual income. The higher the income, the lower the loan. The loan amount starts reducing with family income of just £25,000/year.
However, if you're eligible for benefits, or there's one or more financial dependent children in your household or you've applied for supplementary support, your parents' income's assessed in a different way. Full info's available in the How you're assessed and paid guide.
Here's how it works in practice, for English students returning to uni in 2023/24:
Minimum and maximum maintenance loan amounts for 2023/24
Where you'll be living at uni
Minimum maintenance loan per year
Maximum maintenance loan per year (4)
Living at home
£3,698 (1)
£8,400
Living away from home (not in London)
£4,651 (2)
£9,978
Living away from home (in London)
£6,485 (3)
£13,022
(1) You'll get this if your household income is £56,910/year or more.
(2) You'll get this if your household income is £60,836/year or more.
(3) You'll get this if your household income is £67,422/year or more.
(4) You'll get this if you're household is £25,000 or less.Though the maintenance loan is based on parents' earnings, and there is an implicit expectation they'll contribute financially, the Government has refused to call it that, and I've campaigned hard to make it transparent (see my letter to Government). In a win for our campaign, the Government has finally accepted this needs to be made clear to students and parents, and the Student Loans Company (SLC) has agreed to update its website accordingly.
To help you work out what parents need to contribute, I've made it simple for you, just type in your details into our parental contribution tool below.
Of course, knowing what the parental contribution is doesn't mean parents can afford to pay it. Yet at least it lets you understand what amount is expected, and helps students and parents have an open dialogue on it.
It's also worth mentioning that any money you give your child to go to uni (to help fund living costs or tuition fees) is exempt from inheritance tax. There are no limits to the amount you can give, as long as your child continues in full-time education or training.
My biggest problem is the loan isn't big enough
While most media outlets like to focus on the headline debt figures, in real terms the main issue most students face is that the loan isn't big enough. The amount of money to live off can barely cover accommodation fees in some circumstances.
And right now, the rate of inflation is rising faster than maintenance loans are increasing. Therefore it's crucial to ensure there is a real focus on budgeting, and you don't spend the cash the first few weeks of term. Part-time jobs, any grants and extra cash from parents will all help. See Student MoneySaving tips for more on how to make the cash stretch further and try our student budgeting planner.
You could get more living support if your family's income dropped for any reason
Your maintenance loan entitlement is usually based on the tax year two years prior to the year you apply. But if you think your family income in for the 2023/24 tax year will be at least 15% lower than it was in the 2022/23 tax year, you may be able to get more maintenance support by applying for something called a current year income (CYI) assessment.
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Student loans DO NOT go on credit files
When you borrow from a bank for a credit card, loan or mortgage, to evaluate whether they'll make money from you lenders look at three pieces of information – your application form, any previous dealings they've had with you and, crucially, the information on your credit reference files (full info: How Credit Ratings Work).
Most normal financial transactions and credit relationships you have are listed on these files – yet student loans are not included.
So the only way loan, credit card or mortgage providers know if you've got a student loan is if they choose to ask on application forms. They can do this and it happens, but in general it's only for bigger value transactions such as mortgages.
For more info, see Student loans and your credit file.
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Student debt can impact your ability to get a mortgage, but not as much as people think
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I know many parents worry that now we have £9,250 tuition fees, the subsequent 'debt' will hit their child's ability to get a mortgage after studying.
Of course, having a student loan is worse than not having one when it comes to getting a mortgage, though going to university often results in earning a higher salary, which usually cancels this out.
Many worry about the "huge debt" putting lenders off. Actually, that isn't a problem as student loans don't appear on your credit file, so the impact isn't really about whether you'll be allowed a mortgage or not.
Where it does impact is in the affordability checks which establish whether you can afford to make repayments on a mortgage. Of course, as you have lower take-home income with a student loan, that means you'll be assessed as being able to make smaller repayments. For full help, see Student loans and mortgages.
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You can repay student loans early
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In the early days, the Government was consulting on penalties to stop people repaying early, but the mass of feedback (including our no to penalties submission) was against, and thankfully it decided to scrap the idea.
Yet this doesn't mean you should pay them off early, just because it's allowed. While in general we encourage people to repay their debts as quickly as possible, student loans are one of the rare cases where that will be a bad decision for some people.
This is because under the new system many won't fully repay before the debt's wiped. Overpaying each month could actually be worthless – as the overpayment's not reducing the amount you'd need to pay back at all.
Even if you've enough cash to clear the loan in full, it may not be worth it as your repayments primarily depend on what you earn, not what you borrowed. It could mean you need to repay less than what you owed.
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For more info on repaying your Plan 2 student loan early, see our dedicated guide: Student loan interest is at 7.3% - should I panic or pay it off?
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The very highest earners aren't the very highest payers
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Throughout this guide I've explained that the more you earn, the more you repay. Yet a quirk of the system means technically, beyond a certain point, that's not true.
In truth, for the huge majority of people this isn't relevant – so feel free to skip this technical point – but I add it in for technical correctness and because from a political perspective it is worth examining.
This quirk happens because seriously high earners pay off so quickly they have less time to accrue interest. If we take a ludicrous example to prove the point, if someone earned a billion pounds in their first month of work, they'd have cleared the debt in one month, so no interest would've accrued.
Of course they still repay far more in total than low earners, but it does mean rather perversely that very, very high earners repay less than high earners.
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The student loan isn't a debt. If we changed its name to the more accurate 'graduate contribution', this mythbusting guide would be less needed
The name 'student loans' frightens people. They scare the risk averse, which tends to especially include those from non-traditional university backgrounds, off going to university. They make parents do silly things like borrowing on their expensive mortgage so their child won't be 'in debt'.
Even worse, it means many students have lost the fear of debt, and ended up taking out credit cards or payday loans – after all, if the Government enforces you to 'borrow', what can be wrong with it?
Yet the truth is what we call a student loan isn't really a debt like any other, in fact it acts far more like a tax than a loan. After all...
- It's repaid through the income tax system.
- You only repay it if you earn over a certain amount.
- The amount repaid increases with earnings.
- It does not go on credit files.
- Debt collectors will not chase for it.
- Bigger borrowing doesn't increase repayments.
- Many people will continue to repay for the majority of their working life.
But in reality it isn't a tax, it's more of a contributory contract. In effect though, it's somewhere between the two.
Time to change the name
So if we're looking for a name for this hybrid form of finance, let's try "contribution", as used in Australia. Below are a few key student loan facts where I've changed the word 'repay' to 'contribute', and suddenly they make more sense:
- You need only contribute if you earn enough (£27,295 in a year) once you graduate.
- Your contributions are taken via the payroll.
- The more financially successful you are, the more you will contribute in total.
- If you don't earn enough, you don't have to contribute.
- You only have to contribute for 30 years.
Suddenly this fear of debt looks ridiculous. Would a student say: "I'm not going to university, because if I'm a high earner afterwards they'll ask me for a contribution to my education." Of course not. They'd relish the financial success, and be assured that if they didn't do too well, they wouldn't contribute as much or even nothing at all.
The same is true of parents. Many say: "I'm worried my child will be £50,000 in debt when they leave university, I will do all I can to prevent it." However, I've never heard anyone say: "I'm worried my child will earn enough to be a higher-rate taxpayer after university, I'm saving up now to pay their tax for them."
Let's take this a step further, and put the 'contribution' within the model of income tax. Take a look at this table:
Equivalent 'marginal' (1) tax rates for graduates under 2012+ system
Earnings up to £12,570 No tax – this is within your 'personal allowance', the amount earnable before income tax starts, and under the national insurance threshold Earnings over £12,570, up to £27,295 32% tax and national insurance Earnings over £27,295 up to £50,270 41% due to addition of student loan repayments Earnings over £50,270, up to £124,140 51% due to addition of higher-rate tax, but drop in national insurance (2) Earnings above £124,140 56% due to higher-rate tax (2) (1) 'Marginal' means you only pay the specified tax rate on that portion of salary. For more, see the Tax Rates guide. (2) Earn above £100,000 and your personal allowance will also be affected. I've been campaigning to get the name changed, including meeting with the Universities Minister. For further arguments on this, see my Student loans aren't a debt editorial. Most recently, at a Conservative party conference the Universities Minister agreed with me that student loans should be called 'graduate contributions'. We'll update this guide with any further developments.
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Student loans should be counted as part of students' income
Many school leavers go straight to university with their parents or grandparents yelling "STICK TO A BUDGET!" Yet that simply isn't enough info. Think about this for a moment:
A working person shouldn't spend more than they EARN.
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What shouldn't a full-time student spend more than?
It's this piece of the budgeting jigsaw many people miss, but it's crucial – without knowing your income, you can't budget.
I'd define a student's income as the student loan, any grant, any income from working and any money given by parents or relatives.
Total that up, and this is what you should budget not to spend more than.
It's important to note that while this does include the student loan, it doesn't include 0% overdrafts, which at best should be seen as an aid to cash flow but not income (see our Best Student Accounts guide) or any other commercial debt.
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Warning. This is how it works now. Sadly it can be changed – even retrospectively
So now you understand it, the obvious question is: "How fixed is all this?"
The Government has already sold off the remaining £40 billion of old student loan debt it has – a concern to many of the over four million uni leavers since 1998 with outstanding loans. In itself that can't change the terms and structures of the way the loans work, but it can change operating practices which may be a pain in the neck for some.
Yet it's important to understand Parliament is 'omnicompetent' – in other words, it's completely free to make and change rules made in the past. This means there is no 100% guarantee the system will remain unchanged for the 30 years until you're clear. It's worth being aware this is a risk factor.
In the past, it has always been thought that retrospective changes to the system go against natural justice and it hasn't happened – after all, each time a new student finance system has been introduced, it has only applied to new starters.
Yet that sacred trust was breached in November 2015, when the Government froze the repayment threshold for all those who started in 2012 and beyond – the threshold was meant to be increased. This effectively hiked the cost of student loans above what people had thought they would be when they started university. That shouldn't happen – no commercial firm would be allowed to do this.
The student loan repayment threshold was then increased from £21,000 to £25,000 in April 2018 as part of a wide-ranging review of student finance. It increased yet again to £25,725 in April 2019, £26,575 in April 2020 and to £27,295 in April 2021.
However, the government has frozen the repayment threshold at £27,295 until April 2025. This freeze would mean students earning above the threshold would pay around £113 more per year than they would have done if the threshold had risen by 4.3%, as it was supposed to.
The Government still refuses to enshrine many elements of student loan rates into statute – meaning it can change rates without a vote in the House of Commons. This is a very worrying situation, as it means it is difficult to trust the system. But unfortunately if you want to go to university you've got no choice.
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