Not many people realise that the student loan, or student finance, underwent the biggest change in a decade from August 2023 – the maximum term for repayment was extended from 30 to 40 years!
This slipped under the radar for a couple of reasons. First, the student loan isn’t actually treated as a loan in the sense that the amount you repay isn’t based on the outstanding loan, but instead based on the amount you earn. The student loan, for all intents and purposes, is a student tax.
The second reason this change may have been missed is simply because it has changed so much in recent years. As a sort of ‘back-to-basics’, I’ve summarised the three main types of student loans below as of 2023/24 academic year:
| Plan 1 | Plan 2 | Plan 5 | |
|---|---|---|---|
| University start date | Sept 1998 – Aug 2012 | Sept 2012 – July 2023 | After 1 Aug 2023 |
| Salary threshold | £22,015 | £27,295 | £25,000 |
| Repayment | 9% of income above threshold | 9% of income above threshold | 9% of income above threshold |
| Maximum term | 25 years* | 30 years | 40 years |
| Interest rate | RPI or BoE base rate + 1%, whichever is lower | RPI + 3% or a cap based on average commercial rate | RPI or a cap based on average commercial rate |
| Interest applicable In 2023 | 6.25% | 7.6% | 7.6% |
| Tuition fees | £3,000 per year (Sept 2006 onwards) / £1,000 per year (1998 – 2006) | £9,000 per year | £9,250 per year |
Source: The Patterson Group
*If university was started prior to 2005/06 academic year, the term is until age 65.
You may be wondering: ”What about plan 3 and plan 4?” Well, plan 3 is applicable to postgraduates and plan 4 is applicable to students in Scotland, so, to keep things concise, I’ve narrowed it down to the most commonly used plans.
According to Gov.uk forecasts (1), on average, full-time undergraduate higher education borrowers are expected to take out loans for three years and, for those who started in academic year 2022/23, will borrow on average £42,100 over the course of their studies. While most borrowers will repay at least some of their loan, the income-contingent nature of the loans means that only 27% of full-time undergraduate higher education borrowers are expected to repay their loan in full.
However, with the term of repayment being extended and the lowering of the salary threshold to £25,000, the government are expecting 61% of full-time undergraduate students in the 2023/24 cohort to repay their loan in full.(1)
Given there is now a greater chance that your child or grandchild will have to repay their student loan in full, I thought it beneficial to highlight the impact of this when they start their working life.
Let’s consider someone earning £30,000. This level of income is subject to basic rate income tax of 20% and National Insurance contributions of 8% on earnings above £12,570. In addition, student loan repayments are also owed on earnings over £25,000. In this example, the marginal rate of tax (which is the rate of tax due on every £1 earned) would be a staggering 37% on earnings between £25,000 and £30,000.
In addition, if you consider the impact of pension contributions at 5%, marginal take-home pay is reduced even further.
Should your child or grandchild work their way up the ladder and earn a salary of £65,000, their marginal tax rate would be a staggering 51% (40% income tax + 9% student loan + 2% National Insurance under the new rules). This is without accounting for pension contributions, or the impact of benefits lost, such as Child Benefit, which is reduced on a sliding scale for anyone earning over £60,000. (2)
You may be wondering what is the point I’m making? I’m simply making you aware of the impact the student loan can have on your child’s /grandchild’s finances over the course of their career.
I was a client manager and team leader at Equilibrium for almost 5 years and have since acted as a consultant for several financial planning firms, qualification bodies and other organisations. Through these roles, I’ve come across countless clients who were in the fortunate position to be able to consider funding a child’s or grandchild’s university costs as part of their intergenerational planning.
Prior to August 2023, when asked whether it was worth paying university fees, the answer was usually: “No”. Only 27% of students were expected to fully repay their loan and given the outstanding balance was due to be wiped out after 30 years, the loan would be gone before the vast majority were even considering retirement.
But with the maximum term extending to 40 years, not only will the student loan ‘tax’ be payable for longer, but it may also begin to affect future retirement. The forecasted average UK student loan debt is slightly over £45,000 (3) and helping to fund a loved one’s university costs will always depend on individual circumstances. This article is not designed to tell you how to spend your money, more so to consider how you may be able to best help the younger generation(s) at a time when they need it most.
This blog is intended as an information piece and should not be construed as advice.
To gain more clarity and confidence in how you could look after those you love, please contact us.
Sources
(1) gov.uk/find-statistics/student-loan-forecasts-for-england
(2) gov.uk/high-income-child-benefit-charge
(3) commonslibrary.parliament.uk
