- Student finance applications are open for this year – the deadline is 15 May
- The earliest repayments under English student loan Plan 5 were due this month (for those studying short courses or leaving early), but most of the first cohort of students on Plan 5 will start repaying in April 2027
- Graduates will pay 9% of everything they earn over the earnings threshold
- For Plan 5 this is currently £25,000, and it’s set to rise with RPI from 2027, while for Plan 2 it’s £29,385, frozen until 2030
- The interest rate on Plan 5 matches RPI the previous March which is 3.2% right now
- Under Plan 2 this is somewhere between RPI and RPI plus 3 percentage points, depending on your earnings
- Plan 5 loans aren’t wiped until after 40 years – under Plan 2 this is 30 years
- Under Plan 2, most people won’t clear the loan before it’s wiped but under Plan 5, 56% of graduates are forecast to repay in full
Sarah Coles, head of personal finance at AJ Bell, comments:
“If you’re going to apply for a student loan for September, you need to get cracking, because the deadline is 15 May. You’ll be applying under Plan 5, which went live in 2023. Most of the first cohort of students on Plan 5 will start repaying in April 2027, but some on short courses and those who left early will start this month. The Plan 5 system is going to mean far more people repay their loans in full, which changes the maths for parents and grandparents considering how to pay for university.
“Very high earning graduates are likely to pay less under the new system, because they were always going to repay everything, and the interest will rack up more slowly. Those earning below the threshold still won’t repay a penny – although the threshold is lower than for Plan 2, and isn’t far from the minimum wage, so more will be repaying overall.
“It’s graduates on more typical salaries who could end up with bigger bills. The key factor for many people is that the loans aren’t wiped out for 40 years – up from 30 years for Plan 2.
Should you pay for university for your children?
“For parents and grandparents, it has always been incredibly difficult to calculate whether a graduate will repay in full, because it depends what career they decide to go into, whether they can find work, if they take career breaks, and their state of health. It means this decision has always depended on rough estimates and best guesses.
“On Plan 2, those who hoped their offspring would go into high-flying careers might have waited until they got their first job after graduation, to give an indication of their possible earning potential. If they seemed to be on the fast-track, they may have decided their child would be one of the minority to repay in full and face the highest rate of interest, so they might have covered the cost to protect them. Given that the interest rate is lower on Plan 5, they may decide that a higher income may be enough to help their offspring cover the cost of repayments.
“If you’re expecting more typical career trajectories from your offspring, things are a bit different. If they went through university on Plan 2, they ran the risk that promotions would bump up their interest rate, but there was also a good chance the loan would be written off after 30 years. Under Plan 5, they’re more likely to repay in full and there’s a risk they could be saddled with repayments for the next 40 years. So overall they’re likely to pay more. There are no guarantees to any of this, but if they have the funds available, more parents might choose to pay the bills themselves.
“If you decide not to pay university costs, your child could carry the debt for the vast majority of their working life. It won’t affect their credit record, but it will factor into affordability calculations when they want to buy a property, which could impact their ability to get onto the housing ladder. Some of them will be repaying this debt in their 60s, which means they won’t have the same freedom to super-charge pension contributions. It could mean they have to work later in life or make more sacrifices along the way.
“However, if you choose to pay for university rather than help them onto the property ladder, it could mean they wait far longer to buy a place of their own. Given that mortgages are getting longer, it could mean they’re repaying the mortgage in their 60s or 70s, which could hamper their retirement plans in the same way. If they end up not being able to buy at all, it can have a profound impact on their finances, including in retirement when they have far more costs to cover than their home-owning counterparts.
“All of this assumes you or the wider family are in a position to pay for university out of savings and investments. If you remortgage or borrow money, it will end up costing far more than the initial outlay, as you add interest payments onto the bill for years or even decades. You have to ask whether you are automatically in a better position to take this debt on than your offspring.
“If you spend cash you need for your own future, or dip into your pension, you need to consider the impact it could have on your life. If grandparents spend their available cash, they need to consider how they would cover the cost of care if they needed it later in life. If parents spend their pensions, they need to calculate the impact on their retirement income, and what it could do to their quality of life.
“It means anyone wanting to support their family through university should start making plans as early as possible. If you have 5-10 years or more, then investment has a better chance of growth than cash savings. There will be ups and downs along the way, but you should be able to take advantage of long-term growth. Some parents will want to do this in their own name in Stocks and Shares ISAs, so they have control over how the money is spent. Others prefer to invest in a Junior ISA, and leave the decision to their offspring.”