Six things Martin Lewis says students need to know about 'Plan 5' loans

Martin Lewis, founder of MoneySavingExpert.com (MSE), has revealed six crucial points anyone applying for ‘Plan 5’ student loans needs to be aware of.

These loans, which were introduced for new higher education starters from England in September 2023, represent “the biggest shift in student finance for a decade”, according to Martin.

The expert has warned that Plan 5 loans will increase the cost of university by “over 50% for many typical graduates and double it for a few.”

Taking to his latest newsletter on the MSE website, Martin focused on the practical financial reality of these loans, highlighting six key points that students need to understand.

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

Despite the fact that the price tag for a student loan can reach £60,000, Martin emphasises that this is not the actual cost.

Tuition fees are capped at £9,250 per year (£9,000 in Wales) until the 2025/26 academic year, and most institutions charge the maximum.

However, you don’t need to have the cash upfront. The Student Loans Company pays the fees for first-time UK undergraduates, although those fortunate enough to have the funds can pay upfront without taking out a loan.

Martin Lewis stresses that the price tag is not what matters – it’s what you repay that counts. He explains that repayments only start when you earn over £25,000 a year so if your earnings are below this threshold, you won’t have to pay anything.

He confirmed that the £25,000 threshold is frozen until 2027, when it is ‘planned’ to increase with inflation. Martin also added that you repay 9% of everything earned above the (currently £25,000) threshold.

The money expert also noted:

• You only start needing to repay in the April after you leave university. Though Plan 5 loan repayments won’t start 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’ve cleared what’s owed earlier, you stop paying 40 years after the April you leave university. This means most will be repaying for a good chunk of their working life. The debt is also wiped if you die, so it won’t be an added burden to your beneficiaries. It’s also wiped if you’re permanently incapacitated in a way you’ll be permanently unfit to work.

• You repay automatically via the payroll, just like income tax. Your employer takes the payment via PAYE (pay-as-you-earn) before you get your income, meaning you never need to make payments, therefore you can never miss payments (so no debt collectors). If you’re self-employed, then just like income tax you pay it through the self-assessment scheme. In which case, do ensure you put enough money aside to cover it.
• Your credit file won’t be affected by it. Hence, it doesn’t hinder your ability to get credit for other applications (though it can be considered when determining affordability).
• Even if you relocate abroad, you’re still required to pay back the loan. The student loan is essentially a contract, so your location outside of the UK doesn’t alter that agreement.
• If you have extra money, you can choose to overpay.

There’s an unspoken, official contribution from parents towards living expenses

All students under 60, both full-time and part-time (at least 25% of full study), qualify for a loan to assist with living costs known as the maintenance loan. For most under-25s, your living loan is based on family residual income, which for many is a rough estimate of ‘parental income’.

Martin points out that this evaluation often includes the income of your parent’s partner or step-parent. For those starting in 2023, the loan amount begins to decrease gradually the more above £25,000 (family) income you have less than that, you receive the full loan.

For under-25s, this missing sum is “effectively an unsaid, parental contribution” as the only reason you get less is because your family earns more.

Martin penned: “Until recently, no official documents even hinted that parents needed to be aware of this. The lack of clarity caused friction when students arrived at university without enough funds.”

The amount you borrow isn’t the main factor – Plan 5 loans operate more like a graduate tax.

Martin Lewis has stated that your monthly repayments depend solely on your earnings – for those starting in 2024, it’s 9% of everything earned above £25,000.

He revealed: “The prediction is under Plan 5 loans, 52% will clear within 40 years, however, the majority of university leavers will be paying well beyond the old 30-year cut-off, and 48% for the full 40 years.

“So unless you’re 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, just ignore the amount you ‘owe’.

“Instead, in practice what happens is you effectively pay an extra 9% tax on your income for most of your working life.”

Interest is added, but there’s no ‘real’ cost to it – and not everyone pays it.

For those starting in 2023, there was a cut in the interest rate, which means their loans will be set at the Retail Prices Index (RPI) rate of inflation previously, it was RPI plus up to 3%.

Martin explained: “Inflation in 2023 was very high, with RPI reaching 13.5% in March 2023. So the Government decided to cap the interest rate for all students and graduates, and review it each month. As of April 2024, it stands at 7.8%.

“Yet over the life of repaying the loan, this high rate should balance itself out with low inflation years but let’s be straight, it’ll definitely feel crappy to start with.”

He further clarified that the interest added isn’t always equivalent to the interest paid, as it is “dictated by your earnings and the fact the loan wipes after 40 years”.

He emphasised that this is “crucial to understand” as some individuals mistakenly overpay loans due to unfounded fears of interest they needn’t pay. You can find a full explanation here.

The cost from 2023 will be significantly higher than in previous years.

New starters will be paying more than their predecessors – Martin simplified it into two key points:

• You repay more on the same earnings than predecessors (£207 a year, every year, more if you earn over the old threshold).
• You repay for longer (the loan wipes after 40 years, not 30).

He stated: “The new system leaves many who start university straight after school still repaying it into their 60s. Many typical graduates will pay over 50% more than under the prior system and a few double.”

The highest-earning university leavers (approximately the top 25%, according to Martin) are the ones who benefit from the changes. This is because “repaying more each year means you repay quicker, and there’s less interest, thus less repaid in total.”

Martin concluded: “Overall, 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.”

The system can change (and has before)

Asserting that student loan terms “should be locked into law”, Martin contended that these loans should only be subject to negative alteration through an Parliament Act once university has started.

He observed that it’s evident things can shift – we’ve seen “retrospective tweaks” to student loan conditions, though spirited campaigning saw “the worst was overturned.”

He continued: “Most of the past changes were about the repayment threshold rather than bigger structural problems, and I would categorise the repayment threshold as ‘variable’ it can be tweaked by administrations at their discretion.

“However, the fact this new system (repaying for longer) solely affects new starters demonstrates that significant systemic retrospective negative transformations for individuals are disapproved of, thus improbable, but not out of question. Even so, the final point of my need-to-knows must come with the disclaimer that all this, I believe, is accurate… ‘unless things change’.”