Student finance in the UK is undergoing a major overhaul. Here are three major changes that will affect students entering college in September 2023.
New changes to the system introduced by the government in the form of new ‘Plan 5’ loans will make UK student loans significantly more expensive. Current students and alumni will not be affected.
Lifetime repayments for most graduates with the new Plan 5 student loans are about double those of Plan 2 student loans.
If you’re heading to college this summer, here are three big changes to student finances you should be aware of.
read more: The Complete Guide to Student Funds: 2023 Deadlines and How to Apply
1. Lower student loan repayment thresholds
With Plan 2 student loans, graduates are now repaying 9% of their income over £27,295.
A new Plan 5 loan for students, which will come into force from September, will have students start paying off loans at a lower threshold of £25,000.
- A graduate earning £30,000 a year on a Plan 2 student loan will repay £243.45 each year.
- However, graduates earning the same income on the new Plan 5 loan will instead repay £450 each year.
read more: How do student loan repayment thresholds work?
2. Changes to student loan repayments for graduates
Most students do not pay off their student loans. Instead, the outstanding debt is written off after a few years.
One of the big changes for freshmen is that the loan repayments will last another 10 years.
As it stands, graduates with Plan 2 loans will have their student loans written off after 30 years. The 30-year clock starts in April after graduation.
However, for graduates who take advantage of the new Plan 5 loan, this repayment period will be extended to 40 years.
So, for example, if you take a Plan 2 loan and graduate at age 21, the loan will be amortized at age 51.
However, if you took a Plan 5 loan and graduated at the same age, the loan will pay off at age 61. This means freshmen will have to pay back almost all of their working life.
read more: The highest paying postgraduate jobs in the UK
3. Annual interest rate will fall
Currently, graduates who take out Plan 2 loans are charged an annual interest rate plus 3% based on the Retail Price Index (RPI), a measure of inflation.
However, for the new Plan 5 loans, the interest rate is based solely on RPI, with the 3% surcharge removed.
In other words, a Plan 5 loan is cheaper than a Plan 2 loan.
read more: What the Recent Rise in Interest Rates Means for You
Is it still worth going to college?
New changes to student finances coming into force in September mean we need to think more carefully about the value of a college degree.
Student loan repayments are a form of alumni tax. This is an additional cost that most graduates will pay for nearly all of their professional lives in exchange for their college degree.
For many people, the cost of repaying student loans is worth it because a degree increases their future income potential.
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However, with the new lower repayment threshold and longer repayment period of 40 years, it’s worth calculating how much you can afford to repay with different salaries and see if it’s worth paying back.
Find out more about whether a degree is worth it and the top graduate salaries. If maximizing your earning potential is a priority for you, take a look at the highest paying jobs in the UK.
Are you starting college soon? Check out 10 student money tips and a checklist to prepare for your first year.