University student loans to increase by 50%: Martin Lewis issues step-by-step guide of Plan 5 programme and what this means for students

September this year will see the biggest shift in student finance for 10 years, as the new ‘Plan 5’ loans launch for new higher education starters from England.

The changes are thought to be both minimal and large; on the surface it looks like a minor change, however in reality it will increase the cost by more than 50 per cent for many typical graduates and double it for a few.

There are more misconceptions and misunderstandings about student f inance than any other topic, according Martin Lewis. So he has published a six-step guide on what students need to know about this plan and student finance in general.

Six things everyone should know about student finance

1 - The student loan price tag can be £60,000, but that’s not the cost

Tuition fees are capped at £9,250 annually (£9,000 in Wales) until the 2025/26 academic year and most places charge the maximum. Though you are not required to have the cash to pay all at once.

First time UK undergraduate students don’t usually pay universities or other higher education institutions directly, fees are paid for you by the Student Loans Company. However, the few who are lucky enough to have the funds to pay upfront can do it without getting a loan, but Martin warns not to assume that’s always ‘a winner’.

For most graduates who studied over a typical three-year course, the combined full loan for tuition, and living costs, can be £60,000 and more. But this is not what counts, what matters is what you repay.

- You only repay when you earn more than £25,000 a year; earn less and you don’t pay. So if you never earn over the threshold, you would never pay a penny. The £25,000 threshold is frozen until 2027 when it is ‘planned’ to increase with inflation.

- You repay nine per cent of everything earned above the current threshold or £90 a year. So the more you earn, the more you repay each month. For those earning £35,000 and more will repay nine per cent of £10,000 or £900 a year. If you earn £50,000 you repay nine per cent of £25,000 or £2,250 a year. If you earn £100,000 you repay nine per cent of £75,000 or £6,750 a year.

- You will only need to start repaying in the April after you leave university. Though Plan 5 loan repayments won’t begin until April 2026 at the earliest, so if you were to drop out early, your repayments wouldn’t start until then.

- The loan is automatically wiped after 40 years or if you die. Unless you have cleared what is owed earlier, you will stop paying 40 years after the April you leave university.

- The repayment is taken out of your account automatically via the payroll, just like income tax. Your employer takes the payment via PAYE (Pay-As-You-Earn) before you get your income, which means you will never need to make payments, therefore you can never miss payments.

- If you are self-employed, then just like income tax, you pay it through the self-assessment scheme.

- It doesn’t go on your credit file. So it doesn’t impact your credit worthiness for other applications.

- You will still need to repay if you move abroad.

- You can volunteer to overpay if you have more cash. Though this isn’t a sure thing, in fact for some it can be a big mistake.

2 - There is a, slightly hidden, official parental contribution to living costs

All students under 60 years old, both full and part-time, are eligible for a loan to help with living costs, also known as the maintenance loan. Some over 60s who are full time students are eligible for partial living loans

The living loan amount you get is means tested:

- Age 25+: Those aged 25 or over on the first day of the academic year automatically have independent student status, so are assessed on their own (and their co-habiting partner’s if they have one) residual income.

- Under 25: For most under-25s, even though you are old enough to vote, get married and fight for the country, your living loan is dependent on family residual income which for most people is a rough proxy for ‘parental income’. This assessment often includes the income of your parent’s partner or step parent.

The living loan starts reducing at (family) income of just £25,000. For those who start in 2023, the loan received starts to gradually fall the more above £25,000 (family) income you have; less than that, you will get the full loan.

The full loan is £8,400 for 2023/24 starters if living at home, £9,978 living away from home, £13,022 away from home in London.

Parents are not forced to pay a contribution to the loan, as some parents won’t be able to afford it. If you are under 25 you can apply to be an estranged student which means you will get independent student status, however, many may find the criteria tough.

3 - The amount you borrow is not the key factor as ‘Plan 5’ loans work more like a graduate tax

What you repay every month depends solely on what you earn.

For new 2023 starters, it’s nine per cent of everything earned above £25,000. So when looking at these repayments for a graduate who earns £35,000 as an example: what you owe doesn’t impact what you repay each year. Instead its main impact is whether you’ll clear the borrowing within the 40 years before it wipes or not.

The prediction is under Plan 5 loans, 54 per cent will clear within 40 years, yet the majority of university leavers will be paying well beyond the old thirty years cut off, and 46 per cent for the full 40 years.

Therefore unless you are likely to be a mid to higher earner, or don’t take the full loan, or are lucky enough to have access to large amounts of spare cash, you can ignore the amount you ‘owe’.

In practice, what happens is you effectively pay an extra nine per cent tax on your income for most of your working life.

Due to how hefty the repayment can be, Martin Lewis has campaigned to rename it a graduate contribution system, which is what other countries call a system similar to ours.

4 - Interest is added, but there is no ‘real’ cost to it, and not everyone pays it

The one positive change for the new 2023 starters programme is an interest rate cut; for these loans it will be set at the Retail Price Index (RPI) rate of inflation - in the previous version it was RPI plus up to three per cent.

Student loan interest starts on day one; the rate for each new September academic year is normally fixed each year based on RPI for the previous March (however, this is not confirmed yet for Plan 5 loans). Though in exceptional times, such as now, if the RPI rate is higher than the ‘prevailing market rate’ - which is ill defined, but roughly equates to typical personal loan rates - the interest will be capped at that.

5 - The cost from 2023 will be significantly higher than for previous generations

According to a graphic created by Martin, you repay more on the same earnings that predecessors (£207 a year, every year, more if you earn over the old threshold).

You also repay for longer (the loan wipes after 40 years, not 30).

The only people who gain from the changes, are the highest earning university leavers (roughly top 25 per cent) who would have cleared their loans under the old system.

This is because repaying more each year, means you repay quicker, and there is less interest, therefore less repaid in total.

Overall, Martin says that these changes swing the pendulum of cost further towards the individual, away from the state. The government’s own data shows the state’s contribution will drop from 44p in the pound to 19p under the new system, meaning the individual pays more, the state less.

Martin assures that this all may feel daunting, the fact that university may be more expensive, but it is not a reason not to go if it’s the right place for you.

“University isn’t just about the finances,” Martin said.

“There are many other gains - which will be life-changing for some - and, on average, graduates do earn significantly more than non-graduates, so there is a balance.

“Yet the increase in likely cost for many is certainly a reason for you to understand how the finances work, and to examine whether university is the right choice (or could an apprenticeship or another option be better?).”

6 - The system can, and has before, changed

Student loan terms should be locked into law, so only an Act of Parliament can negatively change them once you’ve started university.

We have previously seen bad retrospective changes to student loans though after a lot of campaigning the worst was overturned.

“Most of the past changes were about the repayment threshold rather than bigger structural issues, and indeed I would view the repayment threshold as ‘variable’ ; it can be changed at the whim of administrations,” Martin said.

“Yet the fact this new system (eg. repaying for longer) only impacts new starters is an example that major systemic retrospective negative changes for individuals are frowned on, thus unlikely, though not impossible. Even so, the last of my need-to-knows has to be the caveat that all this, I hope, is correct… ‘unless things change’.”