Huge changes to student loans coming from September
Major changes to student loans are to be introduced for everyone who is starting university from this September.
Choosing to go to university is a big decision for millions of young people to make and last year the Government announced major changes to how students cover the costs. This is the second major reform the Government has made on University costs since 2012 with the latter being the decision to triple tuition costs from £3,000 to £9,000.
The changes announced have likely made the decision to go down the university route even harder for some students. This only affects those starting university from this year - those who started their studies in 2022 will not be impacted and will be on a different student loan plan.
The changes also only affect those studying who are from England - students from Scotland, Wales and Northern Ireland are on different plans.
The repayment threshold will fall
One of the major changes to be introduced this September is that the threshold of when you start paying your student loans back has been reduced. Currently, after you leave university you start repaying your loan when you earn £27,295 - from September this drops to £25,000.
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Students starting university this year will start paying their loans back much earlier than those who previously studied, although it's worth remembering that anyone earning below this figure will not have to pay anything. This threshold will also remain in place until 2027 when it is "planned" to rise with inflation.
The Government are calling this change "Plan 5 loans" and the only change will be when you pay. So students will continue to pay 9% on everything they earn over the threshold - so the more you earn the more you pay back.
According to the MoneySavingExpert.com website, this is what you will pay back under the "Plan 5" loan for these salaries:
- £26,000 - £90 a year (9% of £1,000)
- £35,000 - £900 a year (9% of £10,000)
- £50,000 - £2,250 a year (9% of £25,000)
- £100,000 - £6,750 (£9% of £75,000)
You should also be aware that the new "Plan 5" loan repayments will not actually begin until April 2026 at the earliest - this means if you drop out early your repayments wouldn't actually start until then.
Just like now, you will automatically start paying your loan back when you reach this level and it will come out of your Pay-As-You-Earn (PAYE) monthly income in the same way tax is taken. If you are self employed you will need to pay it through the self-assessment scheme. You will also need to continue paying your loan if you move overseas.
Time to pay off student loan extended
With the cost of a university education currently sitting at £9,250 a year in England, or £9,000 for Wales, students usually leave university with a debt of £27,750 when they leave - and that only covers the basic course cost. The debt is even higher when maintenance loans are brought into play.
Most students don't pay off this loan, and under the current rules, it is written off after 30 years. So if you finished your university degree this year at the age of 21 your loan will be written off when you reach the age of 51.
But the Government is extending the amount of time you have to keep paying off your loan to 40 years. This means if you finish university with a "Plan 5" loan at the age of 21, it will be written off at the age of 61. This particular change will see new students making repayments for nearly all of their working lives.
Interest rates on student loans to be cut
Interest rates for new students will be lowered in line with inflation. The interest rate, which is charged from the day you are given the loan, is currently the Retail Price Index (RPI) figure plus a 3% charge. The RPI rate is a measure of inflation that tracks the cost of everyday items. However, the extra 3% charge will be scrapped from September.
The rate for each new September academic year is usually fixed each year based on RPI for the prior March, this means the interest rate level for September this year will sit relatively high at 13.5% - although this looks set to reduce significantly by March 2024.
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