In September 2023, student finance will see a shift that it hasn’t seen for over a decade with the launch of ‘Plan 5’ loans for those who will be starting university this Autumn in England. Where it might seem, on the surface, to be something that is largely unnoticeable, the changes are in fact quite major when looked at in more detail. It can be confusing to understand how the new ‘Plan 5’ loan and repayment will work, so here’s everything you need to know about your student loan for 2023/2024.
The cost of your loan is different from the loan price itself
Tuition fees have been capped, in England, to £9,250 per year. This is at the discretion of the university, so you may pay the maximum amount or a smaller amount. It’s important to keep in mind that the price the student loans are capped at will only remain in place until the academic year 2025/2026. However, you don’t need to pay that amount upfront, unless you have the means to pay the university yourself, in full. Most of the time, students don’t pay the university directly for their tuition fees; it’s paid for them by the Student Loans Company.
Where the average three-year university course will cost £27,750, there are other things to think about as well, such as cost of living and student accommodation. By the time all of the aforementioned has been combined, you could be receiving a loan for around £60,000. But the important thing to think about here is that the £60,000 you’re borrowing isn’t something you need to concern yourself with. What does matter, however, is what you’ll be repaying when university has finished. On the new ‘Plan 5’ student loan, the following repayment requirements apply:
- You start to repay your loan when you earn £25,000 a year or over (correct at the time of writing and is set to stay in place till 2027)
- You’ll have to pay 9% of everything that is earned above the current threshold that’s set at £25,000 – the more you earn, the more student loan you repay every month
- You start repaying your student loan in the April after you have left university
- The loan will be wiped after 40 years or if you pass away
- The student loan repayment is automatically deducted by payroll, just like Income Tax and National Insurance payments
- It won’t affect your credit score or your ability to secure a mortgage
- If you move overseas, you will still need to repay your student loan
- You can overpay if you wish, although this is usually advised against by finance experts
There will be a parental contribution to living costs that are somewhat hidden
All students, whether they be full time or part time and under the age of 60 will be eligible for a loan in order to help with living costs. This is often referred to as a maintenance loan. However, the amount of loaned money you receive from the Government will be means tested. For example, if you are under 25-years-old, the loan amount received is based on the family residual income – parental income by proxy. This includes a number of things, including the income of your parent’s partner, their spouse and/or any step parents you might have. If you are over 25-years-old, then you will automatically receive independent student status. This means that you’re tested based on your own income and that of any cohabiting partners or spouses.
Currently, a student will receive the full maintenance loan if their income, or that of their family’s is £25,000 or below. Anything above this, then the amount of maintenance loan you receive will reduce. This is different, however, if you’re studying and living in London or if you’re living away from home to carry out your studies at university.
Where there are no official documents, as of yet, that makes parents aware of this, it’s still something that parents should be aware of as they may be required to help financially with the cost of living for their children who are at university – something that’s often overlooked. If this isn’t something a parent or guardian is able to do, then students may be required to seek part-time work in order to top up their cost of living loan. It’s also important to note that the financial contribution of parents is not compulsory.
The ‘Plan 5’ student loan should be looked at more like graduate tax
What you owe doesn’t impact the amount you repay each year as for 2023 university starters, you pay 9% on everything that you earn above the £25,000 threshold. For example, let’s say you’re a graduate who earns £35,000 per year, the amount you pay back will stay at £900 per year whether you owe the Government £20,000, £50,000 or £100,000.
According to predictions, only 54% of a ‘Plan 5’ student loan will be paid back over the next 40 years, after which it is wiped. This means that, unless you’re planning on becoming a considerably high earner, didn’t take the full loan amount, or have paid the tuition fees yourself out of your own pocket, the amount you owe doesn’t really matter.
Instead of thinking about the amount of student loan you have to pay back, you should look at your student loan repayments as a 9% tax on your earnings for the rest of your working life, much like Income Tax, National Insurance and pension contributions. However, this doesn’t take away from the fact that your student loan repayments will be cheap.
9% additional deductions from your income is a considerable amount, on top of everything else, but it won’t affect your ability to take out a mortgage as it will be considered a higher tax burden rather than a higher debt burden. You should also note that the more you earn over £25,000, the more you pay, so you should factor this in when breaking down costs and budgeting for the future.
Interest will be added to your student loan, but that doesn’t mean to say it’s something to worry about
Interest is something that’s added to any loan repayment, including mortgages, bank loans and even student loans, whether you start this September or 10 years ago. But the good thing is that students who are taking out the ‘Plan 5’ student loan will see an interest rate cut.
Instead of being based on the same factors that a mortgage interest rate is, a student starting in September 2023 will pay the Retail Price Index (RPI) rate of inflation. Before this change, students were having to pay RPI plus 3% on any amount owed. The interest starts almost straight away and is fixed for each new September academic year, although this is based on the RPI for the March before (six months earlier).
If, however, the RPI is higher than the market rate, the interest you pay will be capped at that. Unfortunately, however, this year has been incredibly turbulent when it comes to inflation, so the rate set for 2023/2024 could be as high as 13.5%, which was the RPI inflation rate for March 2023. Despite this, there is some hope in the fact that a market rate cap of 7.1% was in place until August 2023, which could continue thereafter. Over the next 40 years, on the other hand, inflation rates could come down, which means you’ll pay less interest, eventually.
Although, this still isn’t something you should be worried about in the long term, as the interest added isn’t the same as the interest you will eventually pay. Student loan statements can be scary and overwhelming to look at, but don’t let eye-watering figures scare you into overpaying. For instance:
- For the lowest earners, you’ll not have to worry about paying back any of your student loan
- For the lower earners, you’ll pay back some or what was originally borrowed in the next 40 years, but because you’re only just passed the threshold of earnings, your loan will, essentially, be interest-free
- For the low-to-middle earners, you’ll end up paying back everything you owe in the next 40 years, with minimal interest added. This means the interest you pay will be less than inflation
- For the mid-to-high earners, you’ll be expected to pay back around 54% of the total amount borrowed under ‘Plan 5’, but you’ll pay more interest overall than the lowest, low or ow-to-middle earners
- For those earning high salaries, you will be required to pay the interest added, but it will take you less time to pay off the loan, so the interest you pay could be lower overall anyway. For example, if Elon musk earned £1 billion per year, then he will pay off his student loan in one year, making the interest he paid negligible on the whole
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