Martin Lewis: Big student loan shake-up means millions (but not everyone) will pay £1,000s less

On 6 April, we’ll see the biggest change to hit student finance since the new system launched in 2012. It’ll mean millions of university leavers will repay less, not just each month, but many (not all) will see the amount they repay in total reduced by £1,000s.

While it affects almost all uni leavers to an extent, the big impact is on those who started studying in England and Wales in the last six years. As I campaigned for this change, I wanted to bash out a quick blog, explaining how it works, who’s affected and the impact.

What you owe is less relevant than what you repay.

Much student loan talk focuses on the overall debt. As I’ve explained here many times before, for most people it’s far more a psychological issue than a financial one.

What you repay each month depends solely on what you earn, eg, most recent graduates repay 9% of everything earned above £21,000. So take £31,000 earnings (just as it’s easy maths)…

– Owe £20,000: you repay £900/yr
– Owe £50,000: you repay £900/yr
– Owe £3,000,000 (if tuition fees were absurdly hiked to £1m a year): you repay £900/yr

The only difference that what you owe and the interest makes is whether you’ll clear the borrowing within the 30 years before it wipes. And most current graduates won’t, meaning the student loan works far more like a 9% additional income tax for 30 years.

If you’re unfamiliar with how student loans work see my quick Five things every student and their parents should know blog or full 20+ Student Loan Mythbusters guide.

From April you’ll repay less each month.

On 6 April the repayment threshold is increasing – by how much exactly depends on which student loan scheme you’re on. Do take note of whether yours is a ‘Plan 1’ or ‘Plan 2’ loan as I’ll use those terms for the rest of this blog.

  • PLAN 2: All English & Welsh loans for those who STARTED uni in/after 2012. The repayment threshold for Plan 2 loans has been set at 9% of everything earned over £21,000 ever since they launched in 2012. Now for the first time that threshold is being increased. From 6 April it will be 9% of everything above £25,000. Here’s the impact…

    The amount you repay based on income
    Income Current Repayment From 6 April
    £20,000 Nothing Nothing
    £25,000 £360/yr Nothing
    £30,000 £810/yr £450/yr
    £35,000 £1,260/yr £900/yr
    £50,000 £2,610/yr £2,250/yr
    It means at every level of income you’ll repay £360/year (£30/month) less than now, and those who currently repay £360/year or less won’t repay anything.

    Plus from April 2019 the repayment threshold is set to rise annually in line with average earnings – a welcome end to the ‘fiscal drag’ effect. (Fiscal drag doesn’t mean Philip Hammond rouging up – it’s where, if thresholds remain the same while earnings rise, people effectively pay more.)

    PS: Technically you repay 9% of everything earned over £1,750/mth rising to £2,083 in April. Yet if you have a month above this but still earn less than the annual total, you can reclaim it.

  • PLAN 1: ALL loans for those who STARTED between 1998 and 2011 PLUS Scottish & Northern Irish loans since 2012. The threshold for Plan 1 loans moves every year in line with inflation (the Retail Prices Index or RPI measure), and is due to rise again this year, but nowhere near as substantially as for Plan 2. It’s currently £17,775 and is going up to £18,330, so those who repay this now will see repayments drop by just under £50/yr.

  • Pre-1998 starters. These loans work very differently. In a nutshell, if you earn under a set threshold you can choose to defer repaying your loan. That threshold is currently £29,219, and changes every September based on average earnings.

    This September’s figure isn’t published yet, so I won’t go into great detail here (See the Should I overpay my student loan? guide and Erudio problems blog instead). Briefly though, if you earn over the threshold you pay a fixed amount each month based on what you owe divided by 60 (or divided by 84 if you have over five years of loans).

  • Student loans if you now live outside of the UK. For Plan 1 and Plan 2 loans your threshold incorporates the cost of living in the country you live in. If living is cheaper your threshold is lower; if it’s costly the threshold is higher. See Plan 1 overseas thresholds and Plan 2 overseas thresholds.

  • Postgraduate loans. Here you repay 6% of everything above £21,000 – and this will not change on 6 April.

From here on in, this blog is only about Plan 1 and Plan 2 loans for those living in the UK.

PS: This April other 2018/19 tax changes mean most will take home a little more on the same earnings (use our tax calc to see). Yet as I wrote in my last blog, a pension change means many employees will also get a hidden pay rise, but less in their pay packets.

A little bit of politics (skip this if you only want the practicals).

I need to explain why I’m so happy writing this blog. When Plan 2 loans were launched in 2012, it was promised that from 2017 the repayment threshold would start to rise with average earnings.

Yet in 2015 the Government backtracked and froze the threshold until at least 2021. I was incensed by that disgraceful retrospective breach of promise – something no commercial lender would’ve been allowed to do. So I started campaigning against it, as if we’re going to keep this system, consistency and a decent repayment threshold is crucial (my other big bugbear is living loans being too small).

While campaigning, and supporting a successful petition to force parliamentary debate, I met with ministers and the Chancellor, wrote to the PM and even hired lawyers to challenge the legitimacy of the freeze.

In the end the Government did a U-turn and announced this threshold increase, to £25,000. I hear rumours Jo Johnson, and Justine Greening, argued strongly that this had a much bigger impact than slightly cutting tuition fees, something I agree with – see my Why cutting tuition fees bizarrely risks hurting not helping students blog.

Do I need to do anything to make this happen?

No. This should be automatic. Student loans are repaid for you via your employer through the payroll, just like income tax. And just like when tax changes happen, your employer’s payroll department automatically makes the calculations and takes it off your income.

However, there can be payroll errors, so double-check your April payslip; after all for the last six months we’ve been campaigning about the fact 100,000s of graduates have overpaid their student loans and can claim £100s or £1,000s back – see our Have you overpaid your student loan? guide.

If you’re self-employed you repay through self-assessment at the end of the tax year.

Doesn’t repaying less a month mean more interest in the long-run?

I understand why many people ask this – it’s a very good question (OK, I admit in this case I just asked it to myself, so commending it is a little weird – but suspend disbelief for a second and let’s imagine I’m being very prescient and answering readers’ future questions).

While for cash-flow purposes paying less each month is helpful, the normal rule with loans is try to repay as much as possible as fast as possible, to clear the debt as quickly as possible, so there’s less time for interest to accrue.

As always though student loans don’t work like normal loans. Exactly how this manifests, again, depends on your plan.

  • Plan 2 student loans. Before the repayment threshold change was announced, the Institute for Fiscal Studies predicted only 23% of those on Plan 2 loans would repay them within the 30 years before the debt wipes. Now only 17% are predicted to do so (see my if 83% won’t repay student loans, who pays it blog).

    In other words the huge majority, 83% of Plan 2 university leavers, will simply pay 9% of what they earn above the threshold for 30 years until it stops. Therefore paying less each month also means paying less in total – making this change very positive. A reduction of a £360-a-year repayment over 30 years can equate to many £1,000s over the life of the loan (provided a future Government doesn’t change things again).

    The 17% who will clear in full within the 30 years – whether due to high earnings (eg, £35,000+ starting salary and above-inflation pay rises after that), or borrowing less in the first place (eg, not taking the maintenance loan that covers living expenses) – would however find that repaying less each month could mean more interest accrues.

    If you’re one of the lucky few in that group, you can simply voluntarily overpay (though be certain you really want to do this, as once done you can’t ask for the money back). For more on whether this is a good idea see my Student loans 6.1% interest – panic or pay it off? guide.
  • Plan 1 student loans. The effect here is a little more nuanced, though obviously as the increase is far smaller so is the overall impact.

    Most people with Plan 1 loans had no tuition fees or very low fees and lower interest. In which case as your borrowing is much lower, you are far more likely to repay your loan before the debt wipes. Exactly when it wipes depends on a variety of factors, see my When does my student loan wipe? blog for info.

    Therefore as increasing the threshold means you pay less each month, it in return extends the borrowing period, and therefore interest has longer to accrue.

    So this means all but the lowest earners will end up paying slightly more in total. Then again, the interest rate on Plan 1 is just 1.5%, so it really isn’t a big deal.

    Many people have asked me to campaign to have the repayment threshold for Plan 1 loans moved, so it’s the same as Plan 2. That would actually mean many people pay quite a bit more interest before the loan wipes – so it’s not a clear-cut issue (I’d be interested in your view on this in the discussion section below).

    Those from Scotland and Northern Ireland who didn’t study in their home area of the UK (eg, NI student in England) after 2012 will usually have far bigger loans due to £9,000+ tuition fees, and are therefore less likely to clear them before they wipe, but have higher repayments. For many this is the worst of both worlds.

These changes will help your ability to get a mortgage.

Neither Plan 1 nor Plan 2 loans go on your credit file, so they are not seen as a debt by lenders and are unlikely to affect whether a lender wants to lend to you.

They do affect your affordability score though, which dictates how much a lender is willing to give you. Student loans are often treated very much the same way as changes to tax rates, because just like tax, repaying your student loan reduces your disposable income.

Therefore, for those on Plan 2 loans especially, the increase in the repayment threshold is positive, roughly akin to you getting a £500 salary increase. It’s not the deciding factor but it’s moving in the right direction.

Is anything else changing this April?

Yes, for those on Plan 2 loans the interest rate thresholds are also changing. Student loan interest rates are based on the RPI rate of inflation (the rate at which prices rise). While studying, until the April following graduation, you’re charged RPI + 3%. As the current RPI rate is 3.1%, this is 6.1%.

After that it depends on your annual earnings, and the thresholds ever since they launched in 2012 have been the same, but these change on 6 April.

Earn under £21,000 (rising to £25,000 on 6 April): Interest rate = RPI
– Earn over £41,000 (rising to £45,000 on 6 April): Interest rate = RPI + 3%
– Earn from £21,000 to £41,000 (rising to £25,000 to £45,000 on 6 April): It rises gradually from RPI to RPI + 3%

So on the same earnings, less interest may be added. The impact of this is limited for many though, as they won’t pay the full interest added – see my Student loan 6.1% interest – panic or pay it off? guide for why.