Plan 5 student loan explained: What’s changed for students in 2023 intake?
- The new ‘Plan 5’ changes will affect students starting from August 2023
- Some will repay more than double the amount of previous years
- Graduates will start paying back their loans at a lower salary
Students starting their undergraduate degrees this September are likely to pay back twice as much in student loans over their lifetimes as those who went to university in previous years.
Under the new Plan 5 loan, which applies to those starting their degrees from August 2023, graduates will start paying back what they owe when they earn £25,000 per year.
This salary is lower than previously. Those who started their degrees between 2012 and 2022 began repayments when they had an income of £27,295.
New rules: This year’s university intake will probably pay back far more in student loans than those who started earlier
This year’s students will also be paying their loans back for 10 years longer. The remaining unpaid balance of a student loan will now be cancelled after 40 years, instead of 30.
This means that on an average salary of £33,000, just under the national full-time average according to the Office for National Statistics, graduates can expect to pay back a total of £38,800, compared to £15,120 for those on the same salary in previous years, Save the Student has said.
If someone is on the average salary, they will pay back £60 a month to the Student Loans Company under the new Plan 5 system. Students under the old system would pay nearly a third less on the same wage.
Taking into account the extra 10 years that graduates will be burdened with debt, they will end up paying an extra £20,000 on average.
Those on lower salaries will be faced with an even greater impact on their finances. While someone on £27,500 would previously be paying back just £1 a month of their loan, under Plan 5 they would instead pay £18.
How do student loans work?
The Tuition Fee Loan is transferred directly from the Student Loans Company to the university, while the maintenance loan is transferred into the student’s bank account.
With tuition fees capped at £9,250 a year and the additional maintenance loan, which is calculated based on household income, the average student will leave their time at university with about £33,000 in debt.
This year’s students will pay 9 per cent of their income each month, once they graduate and earn over £25,000. That threshold is frozen until 2027.
This year, interest on the loan is charged at a rate of 7.1 per cent.
After 40 years, the remaining balance is wiped.
As the loan balance keeps increasing year, it becomes less and less likely it will be paid back in full.
This doesn’t mean that the amount repaid each year will increase, just that the debt will keep piling up.
Interest is charged from the point the loan is taken out, and the interest rate is usually set on 1 September each year, based on the Retail Price Index of the previous March. This year, the interest rate will be 7.1 per cent.
Tom Allingham from Save the Student described the Plan 5 changes as ‘incredibly regressive.’ He said that ‘while most graduates will pay more – as much as double, in some cases – the highest earning graduates will actually repay less than under the old system.’
This is because they will be able to clear the loan quicker, and therefore pay far less in interest.
He added: ‘Although the structure of the repayments means that they should still be fairly manageable, it seems utterly unfair to have a system whereby those who have reaped the biggest financial benefits from attending university, are repaying less than their peers.
‘We can only hope that prospective students aren’t put off attending university as a result of another unfair student finance policy.’
A Department for Education spokesperson said: ‘It is important that we have a sustainable student finance system that is fair to students and taxpayers.
‘We have cut interest rates to RPI only so that new borrowers will not repay more than they originally borrowed, when adjusted for inflation. Through these reforms more than half of borrowers will repay their loans in full, compared to the current rate of 20 per cent.
‘To help students who need further support, we are making £276 million available this academic year, which universities can use to top up their own hardship schemes. This is on top of increases to student loans and grants.’
The Department for Education suggests that asking graduates to start repaying loans at £25,000 will help the Government to continue ‘supporting’ higher education, as it keeps costs down for taxpayers.
Maintenance loans ‘don’t cover living costs anywhere’
The financial hit of going to university begins long before students graduate and begin repaying their debt.
Maintenance loans no longer cover living costs in any student city in the UK, Wealth.co.uk has revealed.
It has calculated that there is on average a disparity of £788 a month between the maintenance loans offered by the Government and students’ living costs.
As a result, nearly half of students in the UK are finding themselves running out of money by the end of the semester, according to NatWest’s latest Student Living Index. This figure has risen by more than 10 per cent since 2022.
Despite maintenance loans becoming inadequate to sustain living costs, they are making up a bigger proportion of students’ overall income.
Loans made up 54 per cent of students’ monthly income in 2023, rising by 5 per cent compared to a year ago.
On top of that, students’ costs are being driven up by inflation.