Updated 03 December 2021
The interest you pay on some student loans is changing from 1 January 2022. But who exactly will these changes impact, and what do they look like in practice?
Here’s everything you need to know about the latest changes to student loan repayments plans and thresholds.
Most aspects of the student loan are staying the same, including the amount you can borrow for your maintenance loan, your tuition loan and the repayment threshold. The only thing that is changing is the amount of interest you’ll earn on your overall loan amount.
Between 1 October 2021 and 31 December 2021, the maximum rate of interest applied to student loans will be capped to match the rates applied to comparable unsecured personal loans, which have recently reduced. This means the maximum interest rate will reduce by 0.4%, to 4.1%. From 1 January 2022, however, they will go back to around 4.5%, or RPI+3 (Retail Price Index).
The changes will apply to Plan 2 Income Contingent Repayment (ICR) student loans, which were taken out after September 2012, and Postgraduate student loans on the Postgraduate payment plan. We’ve already put together a comprehensive guide that takes you through the basics, so check out everything you need to know about student finance to find out more.
While the changes aren’t insignificant, they’re unlikely to make a material difference to the average borrower. Reducing the interest rate and capping it so it is in line with private products will mean the amount you owe overall increases by less, but it will still increase year-on-year until your balance is cleared.
In most circumstances, a lower rate of interest on your loan balance would be something to celebrate. But student loans are vastly different from something like a mortgage or personal loan (which we’ll come onto in just a moment).
However, when you consider the fact that the government expects just 25% of those currently in undergraduate studies to pay their student loans off in full, these changes are unlikely to have a noticeable effect on many students. The vast majority of borrowers will only make a dent in the initial loan amount, let alone any added interest.
In the UK, there are four student loan repayment plans that apply to UK and EU citizens.
The first, Plan 1, applies to English or Welsh students who began their UK-based undergraduate studies between 1 September 1998 and 1 September 2012, as well as Northern Irish students who have studied in the UK since 1 September 1998. EU students may also be on Plan 1 if they studied in England or Wales between 1 September 1998 and 1 September 2012, or in Northern Ireland after 1998.
Plan 2 applies to English and Welsh students who started a UK-based undergraduate course on or after 1 September 2012. EU students who started studying an undergraduate course in England or Wales after this date are also on Plan 2, as are those who took out an Advanced Learner Loan on or after 1 August 2013.
Scottish students who commenced their UK-based studies (undergraduate or postgraduate) on or after 1 September 1998, or EU students who did the same in Scotland, are on Plan 4.
If you chose to complete postgraduate studies, you’ll be asked to repay in line with the Postgraduate Loan repayment plan. This applies to English or Welsh students who took out a Postgraduate Master’s Loan on or after 1 August 2016 or a Postgraduate Doctoral Loan on or after 1 August 2018. It also applies to EU students who began any postgraduate course on or after 1 August 2016.
Unlike in countries such as America, student loans for UK citizens are not treated like private debts. Instead, they are taken directly from your pay once you meet a minimum student loan salary threshold.
Lots of people view student loans is a similar light to a tax, as your payments are worked out based on your income and are taken before they ever reach your pocket. They’re not something you need to budget for every month or worry about actively repaying yourself.
You can find out more about funding education in our previous article, which takes you through the need-to-knows of student finance.
At the time of writing, the repayment threshold for Plan 2 ICR loans is £27,295 and graduates pay 9% of their earnings above this. For example, if your salary is £100 above the threshold (£27,395) you’d pay just £9 every year.
The threshold for Plan 1 loans is lower, at £1,657 per month (equivalent to a salary of £19,884 before tax), but you still pay 9% of any amount over this. Interest hasn’t changed for Plan 1 and it remains at 1.1% of the amount owed.
The Postgraduate loan threshold hasn’t changed despite the alterations to the interest rate. You’ll still be asked to repay 6% of your earnings above £21,000 if you chose to take out a loan for your postgrad studies.
The short answer? It’s rarely a sensible financial decision to pay off your UK student loan any faster than you’re legally required to, as MSE’s Martin Lewis says. On the face of it, it seems very counterintuitive to actively avoid paying off any sort of debt – and it’s certainly not something we’d advise for anything other than government student loans. But student loans are different than most forms of borrowing for a few simple reasons:
They’re written off after 30 years. Private debts will affect your life until they’re paid off. Student loans, on the other hand, are written off entirely 30 years after your graduation or the year you left your studies.
You’ll never be chased by debt collectors or bailiffs. Unpaid student loans will never cause scary individuals to start banging on your door. Your repayments are paused if you’re unemployed or below the earnings threshold and are taken before your wages are paid to you (like your National Insurance contributions are) so you can’t forget to pay them.
Many people will never naturally pay them off. Even if you earn a reasonable wage, many workers will never pay their full student loan amount off. Using your savings or taking out a loan to pay off an amount you may never have been fully liable for is arguably one of the worst financial decisions you can make.
If you built up any private debts during your studies, such as on a credit card or overdraft, it is far better to prioritise paying these off instead. Unpaid student loans won’t affect your credit score, while large private debt could, making it harder for you to access better rates on private borrowing or get a mortgage. Worried about how much you’re borrowing? Here are the 4 best ways to reduce student debt.
You’re never too young to seek advice about a complex topic like your finances. Whether you’re worried about the impact of your student loan on your future financial prospects or want to start planning for big milestones, like buying a home, it’s always best to speak to an independent financial adviser. It’s their job to separate fact from fiction and give you honest, trustworthy advice that’s tailored to your unique circumstances.
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