Student Loans

Student loans, and more particularly the repayment thereof, are a hot topic in the news at the moment. There are particular concerns about the affordability of the legacy (Plan 2) scheme which applies to all loans taken out before August 2023, and has resulted in crippling interest rates due to the built-in 3% surcharge above RPI. The government is under pressure to act on this, and many are starting to question whether university education is really still 'value for money' in the 2020s.

To help crystallise ideas for the prospective (or indeed established) student, I thought I'd take the opportunity to take a closer look at the repayment side of things, and particularly the question of whether you should or shouldn't over-pay in order to reduce the balance you owe. 

The system is quite complex, with a  number of variables which are subject to change from year to year, so I've generated a useful app to  model various situations and hopefully answer the overpayment question. You'll find this at the bottom of the page - try it yourself -  I guarantee you'll be surprised...and probably quite shocked, at the amount the government will be milking from your salary payments during the 30 (or 40) year term over which you'll be repaying your loan. (NB although you can use the simulator via Google Sheets, I'd recommend you download it to your own pc if you have Excel installed - makes for a smoother ride....)

A veritable 'cash cow' for the treasury, for sure.

I won't go through all the rules which apply - you'll find these online e.g. the government's own section on repayments 

If you apply the calculator to an 'average' £50,000 loan balance with the current earnings threshold of £25k and a 9% p.a. repayment rate, using the current Plan 5 rules, it becomes apparent just how much the debt balance (the amount displayed on the y axis of the graph) builds up with the current RPI 'average'  value of 3%. Fortunately you don't have to pay this back monthly, but it does accrue in your loan balance as soon as your payments start coming in (and not just when you start paying back). 

Here are some recommendations on strategy for minimising your payments once you finish your course and your earning rise above the salary threshold:

Plan 5: This is the current plan applicable to any loans started after August 2023. As you might expect, the scheme is designed such that middle earners (i.e. those earning in the salary range between £30k and £60k during the loan payback period) will repay the whole of their loan plus any interest accrued. 

Middle earners: The only reason for making extra payments would be to pay of the debt more quickly and thus minimise extra interest accrued. To make this worthwhile, a substantial extra payment (e.g. £250 pcm) would be needed, since the majority of the interest burden lies during the early years. Paying this amount extra monthly would save ca £26k in interest by paying off the loan in ca 11 years rather than the 35years it would otherwise take, but it might not be affordable early on in your career.

Lower range earners: For an earner at the low end of the scale e.g. £25k-£35k range, the majority of the residual debt would be written off under plan 5 (ca £35k) and repayments would only amount to ca £18k. Thus the strategy for this group should be to avoid throwing good money after bad by paying any extra. A further reduction in repayments due could also be achieved by splitting work into more than one employment (quite common for people working part time nowadays). Repayments are assessed on each employment separately, thus you could still earn up to £24999 from each of 2 separate jobs and still repay nothing. 

Higher range earners: as for lower earners, the position is more clear cut - you'll inevitably repay the whole of your loan within the 40-year wrtieoff period. Thus your strategy should be to pay off the remaining debt as quickly as you can afford to. Someone starting at £40k and finishing at £80k would take ca 22 years to pay off their debt, accruing nearly £20k in interest. Paying off at our figure of  £250 per month would save them ca £11500 in interest and pay off the debt 13 years sooner. Those lucky enough to have access to the 'bank of mum and dad'  and able to pay it all off via a lump sum would do even better, with any interest remaining 'in the family', (and probably forming part of their inheritance at the end of the day....assuming mum and dad haven't spent it all on cruising before they go!).

Plan 2: This is the 30-year repayment 'legacy ' scheme which only applies to student loans taken out before 1st August 2023.  If you have one of these, you'll already be paying it off, so would be advised to check your loan account to check your current balance remaining and payments before using the modeller. 

Although your strategy should be broadly similar to plan 5, the shorter term increases the likelihood of writeoffs. The higher repayment rates attempt to compensate for this. The higher salary threshold will also help those on low incomes by reducing payback liability during your early years. Thus extra payments are only appropriate for the highest earners, e.g someone earning £40k-£70k would accrue £40k in interest charges over 25 years, and save themselves £26k by paying £250 pcm extra. A no-brainer for anyone who can afford it.....

First published 7.2.26; revised 11.2.26