Degrees: A Lifetime of Debt
Two years ago, university students beginning their degrees were faced with a new loan plan from the government, repayment plan 5. However, it is only now that the full effects of this change are becoming apparent, with monthly payments for 2023 intake students beginning from next April. Not only that, students applying in 2025 will also be seeing further changes from the new system. So, what does this mean for student debts going forward?
Repayment plan 5 replaced the previous plan 2 for all undergraduate and Advanced Learner Loan courses for all students enrolling from August 2023 onwards and brought significant adjustments to the nature of student debts. Previously, postgraduates were expected to repay loans in monthly payments for 30 years after their graduation until the debt was cancelled, unless they managed to repay it in full. The new plan extended this repayment window by an additional decade, so it will now impact practically all of a student’s working life.
Payments are automatically removed from the student’s monthly pay check by their employer if they are above the earning threshold for payments. This was £27,295 per annum on the older scheme but was lowered to £25,000 (£480 per week), so payments will be more widespread across earners. Only income above this threshold will be taxed, by 9%. This equates to £22 for an income of £28,000, or £60 for an income of £33,000.
There is only an expectation to pay if earning is above the threshold, and payments will automatically start or stop if this changes. Those below the threshold can still pay if their weekly or monthly payment exceeds the threshold. This can be refunded, but only if annual earnings is below the threshold. Voluntary payments can also be made at any time, but these do not deduct from the taxed amount.
The real issue with the extension is the extra interest that will be accumulated. It will be increasingly more difficult to pay off debt as interest will increase it over time. For example, a postgraduate earning £35,000 annually will pay around £9,000 more than a student on the old scheme, and still not clear their debt. However, there is one positive - to balance the lowered threshold, interest rate was lowered by 3%, to be purely based on Retail Price Index (RPI), a measure of inflation.
Despite this, the system had been criticised for its targeting of only lower to middle earners. Higher income earners are unlikely to experience much difference, as those with a salary above £45,000 can pay off their debts in around 25 years or less on either plan.
In addition to the changes to debt payments, the government also issued a crack-down; what is referred to as a ‘Mickey Mouse’ degree. This signifies that a course, if the government deems it to not have ‘good outcomes’ (based on average salary), will be capped for recruitment. This is a change that will first become evident with 2025 applications and generally means that less courses will be available.
Furthermore, student maintenance loans and tuition fees were raised by 3.1% in November 2024, to meet inflation, so 2025 students will be the first to experience these raised costs throughout their whole degrees. While this will not raise monthly payments, it will create a greater amount of debt, particularly as interest is accumulated.
With rising costs, and these changes still potentially subject to change, it is more important than ever that students are certain university is the right choice for them. Student debt is a lifetime commitment, so the value of the degree must be equal for the student.
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