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What is the new Plan 5 student loan and how does it affect you?

George Jones analyses how the new Plan 5 loan system — the biggest change to the student finance system in over a decade — will affect students.

By George Jones, Co-Deputy Opinions Editor

Under the new ‘Plan 5’ student loan system, 60% of undergraduates are now predicted to repay their student loan in full. The cost of financing student loans is being pushed further onto students, but how?  

February 2022 saw the UK Department for Education announce a switch from a Plan 2 to Plan 5 student loan system, commencing on the first of August 2023 for new undergraduates. This change introduces an alternative repayment system, meaning those due to graduate in 2026 and 2027 will pay 50-100% more in student loan fees than those under the old Plan 2.  

‘Fairer for Taxpayers’

With the aim to ‘Ensure value for money for the taxpayer’ — as stated by the UK government and the Department for Education — it is predicted that most students will be paying off their student debt well into their 60s. The plan aims to ensure that over 50% of graduates repay all their student debt, increasing from around 20% of graduates under Plan 2.  

A lowered repayment threshold (from £27,295 to £25,000) and a lengthened repayment period — increasing from 30 years to 40 years — constitute some of the changes that have been introduced. 

Under the original Plan 2 student loan system, if you earn £30,000 (£2,705 above the threshold) you would pay back £243 annually. However, under the new Plan 5, if you earn £30,000 (now £5,000 above the threshold) you will now pay £450 annually, meaning that more will have to be repaid on the same earnings.   

‘Deeply regressive’

Plan 5 marks the biggest alteration of the student loan system in England since 2012. Economic and education experts have scrutinised the new changes.  

A new report co-authored by Gavan Conlon (a Senior Partner at London Economics) stated these new changes are ‘deeply regressive’; disproportionately affecting middle and lower income families who will be subject to higher lifetime loan repayments. To summarise, those earning around £46,000 or below should expect to pay higher under the new system — up to 174% more at most.  

‘A massive subsidy to predominantly white, predominantly male graduates’

Additionally, Plan 5 includes the cutting of interest rates from Retail Price Index (RPI) of inflation plus 3%, to just RPI of inflation. This may initially appear to be a positive change, as the added interest is lower, however Gavan Colon states this cut amounts to ‘A massive subsidy to predominantly white, predominantly male graduates.’ Statistically, this group are higher earners and can pay off their student loans quicker, therefore avoiding the accumulating interest. 

Liz Emerson, Chief Executive of the Intergenerational Foundation, described the switch as a reform that ‘will entrench inequality’. As the London Economics model highlights, lower earners will pay more than the top-paid graduates. 

‘I looked at apprenticeships […] university was my only choice’

Epigram spoke to Millie Tanner — a first year UWE student — to hear her thoughts about Plan 5. She believes that ‘Having a longer payback time will put people off going to university.’

For example, Millie stated that the switch encouraged her to look at apprenticeships, to avoid facing increasing costs under the new loan repayment system. 

‘With the cost-of-living crisis and how expensive housing is, having that extra payment to worry about isn’t good. I looked at apprenticeships and routes into the job, but university was my only choice.’  

Concerns regarding the increase in costs have led to serious questions surrounding the value of university. ‘To not be guaranteed a well-paying job that will support you and make it all worth it’ is clearly a growing anxiety that Millie and other first year students are experiencing.  

Despite the criticism, government officials are adamant the new system is ‘Progressive overall’. The motivation to adjust interest rates was to ensure that new borrowers will not repay more than what they originally borrowed, in order to account for the current rates of inflation. 

A spokesperson for the Department of Education claimed that student premium funding is to increase to £276m this academic year to support disadvantaged students. 

However, the Welsh government has rejected implementing the new plan 5 in favour of retaining their current system, which they believe to be more progressive. 

Mari Leonard is a third-year student at The University of Bristol and is on the Student Finance Wales scheme. Speaking to Epigram, she says that if such change were to occur for Wales, it would be ‘counter-intuitive’, working against many programs that aim to incentivise Welsh students to go to university, such as the Seren Network.  

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Although the effects of ‘Plan 5’ remain to be seen, pressures to ensure 2026 & 2027 graduates secure a high paying job will undeniably grow in response to the alterations made to the student finance system. 

Do you think the new system will deter more people from going to university?