Martin Lewis issues students six warnings over 'Plan 5' finance loans

Martin Lewis, founder of MoneySavingExpert.com (MSE), has disclosed six essential points that all applicants for 'Plan 5' student loans should keep in mind. Martin stated that the loans for new higher education students from England in September 2023 mark "the most significant change in student finance in ten years".

The specialist cautioned that Plan 5 loans would raise the university expenses by more than 50% for most average graduates and double it for a small number. In his most recent newsletter on the MSE website, Martin emphasized the practical financial implications of these loans, outlining six important points that students should be aware of.

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

Tuition fees are capped at £9,250 a year (£9,000 in Wales) until the 2025/26 academic year and most places charge the maximum. But you don't need the cash to pay upfront.

First-time UK undergraduates don't usually pay universities or other higher education institutions directly. Fees are paid for you by the Student Loans Company - though the few lucky enough to have the funds to pay upfront can do it without getting a loan.

According to Martin, the price tag isn't what counts - it's what you repay that does. He broke it down and revealed that you only repay when you earn over £25,000 a year –so if you earn less and you don't pay.

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.
  
  

• It doesn't go on your credit file. Therefore it doesn't impact your ability to access credit for other applications (though it can be taken into account when working out affordability).
  
  

• You do still need to repay if you move overseas. The student loan is technically a contract, so the fact that you're no longer in the UK doesn't affect that contract.
  
  

• You can volunteer to overpay if you have more cash.

There is a hidden, official parental contribution to living costs

All students under 60, both full-time and part-time (minimum 25% of full study), are eligible for a loan to help with living costs – known as the maintenance loan. For most under-25s, your living loan is dependent on family residual income, which for most people is a rough proxy for 'parental income'.

According to Martin, this assessment often includes the income of your parent's partner or step-parent. For 2023 starters, the loan received starts to be gradually reduced the more above £25,000 (family) income you have – less than that, you get the full loan.

For under-25s, this missing amount is "effectively an unsaid, parental contribution" – as the only reason you get less is that your family earns more. Martin wrote: "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 key factor - Plan 5 loans work more like a graduate tax

According to Martin , what you repay each month depends solely on what you earn. For new 2024 starters, it's 9% of everything earned above £25,000.

He said: "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

There was an interest rate cut for 2023 starters, which means their loans will be set at the Retail Prices Index (RPI) rate of inflation – in the prior version, it was RPI plus up to 3%. Martin said: "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 also explained that the interest added isn't always the same as the interest you pay, as this is "dictated by your earnings and the fact the loan wipes after 40 years". He added that this is "crucial to understand" as some people wrongly try to overpay loans due to misplaced fears of interest they needn't pay. He explains it fully here.

The cost from 2023 will be substantially higher than for previous years

New starters will be paying more than previous years - Martin broke it down into two simple 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 said: "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 (roughly the top 25%, according to Martin) are the people who gain 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 added: "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)

Martin claims that student loan terms "should be locked into law", so only an Act of Parliament can negatively change them once you've started university. He said that it's clear things can be changed - we have, after all, seen "retrospective tweaks" to student loan terms, though after much campaigning "the worst was overturned."

He added: "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.

"Yet the fact this new system (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'."