The lowdown on the new student loan system

Students are under increasing financial pressure to pay for their studies — and recent changes to how graduates pay back their loans will leave the lowest earners worse off.

Last September three big changes to loan repayments were made that are affecting those who started university during the 2023/24 academic year onwards.

The changes mean that although no graduate will repay more than they borrowed in real terms, lower earners will end up paying more than they would have under the old plan, while higher earners will pay less.

“The burden has been moved away from higher earners and put on lower and middle earners,” says Tom Allingham, the communications director for the money website Save the Student.

“Fundamentally that is not fair — those who go on to earn more from a university degree should be paying a higher chunk, and we shouldn’t be shifting that backwards on to lower earners to pay.”

Instead of paying for fees upfront to universities from their own pockets, UK nationals who have signed up for an undergraduate degree course can apply for a student loan to cover their tuition fees in full. They can also apply for a separate student loan to help towards living costs, which is called a maintenance loan.

How much you’ll be charged for tuition fees will vary depending on which university you go to and where it is located in the UK. Fees are capped at £9,250 in England, and most universities charge the maximum, which adds up to £27,750 for a typical three-year course.

In Wales fees are capped at £9,000 and in Northern Ireland at £4,710. In Scotland fees are capped at £9,250, although Scottish and EU students don’t have to pay anything.

How much you get in maintenance loans depends on where in the UK you are from (each country has its own funding body), and it is means-tested on your household’s income. According to Save the Student the average maintenance loan is approximately £6,116 a year.

Interest on your loan starts accruing from the moment you take it out. You repay 9 per cent of your income over the earnings threshold.

However, the way in which students need to pay their loans back has changed. Students who started studying in 2023/24 and beyond will start repaying under the Plan 5 scheme. The previous scheme was called Plan 2.

The first big change between the new and old system is that student loans will now be written off after 40 years; it had been 30 years. That means graduates will be making repayments for longer, and possibly into their sixties.

Second, the earnings threshold for when graduates need to start repaying their loans has been cut from £27,295 to £25,000, which will be frozen until 2027. That means that anyone earning over £25,000 will make higher monthly repayments under Plan 5 than they would have done under Plan 2, because 9 per cent of their earnings are paid over a lower threshold.

The third change is that the maximum interest rate that can be charged on loans will drop. Under the old plan interest was charged at the rate of retail price index (RPI) inflation plus 3 per cent. The additional 3 per cent will be scrapped under the new plan — so you will just be paying the rate of RPI inflation.

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Kate Ogden, a senior research economist for the Institute for Fiscal Studies, says that while the changes mean higher earners pay less, lower earners will be the worst off.

“With the increase to the period before loans are written off coupled with a fall in the repayment threshold, we expect graduates with low lifetime earnings to repay more on average under the new terms,” she says.

“But with the fall in the maximum interest rate charged, those who expect to fully repay their loan will pay less under the new system because they’ll repay less interest.”

Graduates on Plan 5 are expected to leave their studies with an average of £43,700 worth of student loan debt, according to government forecasts, compared with £45,600 for the last cohort of Plan 2 students, who started their studies in 2022/23.

Based on these figures a Plan 5 graduate with a starting salary of £30,000 would pay £6,000 on average more under Plan 5 (approximately £37,000 in total) than they would under Plan 2 (about £31,000), according to estimates from Quilter, the wealth manager.

That assumes an average wage growth of 4 per cent per year. Those on a £40,000 starting salary would pay £11,000 more in total (£89,000 under the new plan compared with £78,000 under the old one).

However, those with a starting salary of £50,000 would pay £14,000 less (£106,000 under Plan 5 instead of £120,000 under Plan 2). Those with a £75,000 starting salary would pay £6,000 less (£64,000 under Plan 5, £70,000 under Plan 2).

Both lower and higher earning graduates will have to make higher repayments under the new plan thanks to the changes made to the earnings threshold.

Graduates earning £30,000 will pay £244.08 a year under Plan 2 but £450.37 a year under Plan 5, and those earning £40,000 pay £1,144.45 a year under the old plan but £1,350.36 under the new one.

“Students on Plan 5 are under greater pressure to repay,” says Ian Futcher, a financial planner for Quilter. “More of their salary will be going towards student loan repayments and their finances will be stretched further as a result.”

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