The UK’s latest student loan framework is beginning to affect borrowers, with significant changes to repayment terms and thresholds. Known as Plan 5, the system is set to apply to most new graduates, altering how much they repay and how long they remain in debt.
The shift marks a notable departure from previous arrangements, particularly Plan 2, and raises questions about long-term financial pressure on graduates. According to AJ Bell, the new structure could result in many borrowers continuing repayments well into their 60s, especially those on average incomes.
Lower Repayment Threshold Expands the Number of Borrowers
Under Plan 5, graduates are required to repay 9% of their income above £25,000. This represents a reduction from the £29,385 threshold under Plan 2, which remains frozen until 2030. As a result, more individuals, including those on relatively modest salaries, will now be required to make repayments.
According to reporting from AJ Bell, this lower threshold is expected to pull a broader segment of the workforce into repayment. Even those earning closer to minimum wage levels may now contribute, whereas previously they might not have met the threshold.
Interest rates have also been adjusted. Plan 5 loans accrue interest in line with inflation, currently 3.2%, while Plan 2 loans can reach rates of up to the Retail Price Index plus 3 percentage points, depending on income. Although this change may reduce the rate at which interest accumulates for some borrowers, it does not offset the broader structural shift in repayment duration and eligibility.
Sarah Coles, head of personal finance at AJ Bell, explained that the system “changes the maths” for those considering university funding. According to her, high earners may ultimately pay less under Plan 5 because they were already likely to repay their loans in full, now with slower interest accumulation.
Extended Repayment Period Increases Lifetime Financial Burden
One of the most significant changes under Plan 5 is the extension of the repayment period. Loans are now written off after 40 years, compared with 30 years under the previous system. This longer timeframe increases the likelihood that borrowers will repay their loans in full.
Estimates indicate that around 56% of Plan 5 graduates are expected to clear their debt entirely, a marked contrast to Plan 2, where most borrowers did not fully repay before the balance was written off. According to AJ Bell, this shift places a heavier financial burden on those with average earnings, who are more likely to repay over a longer period without benefiting from loan forgiveness.
Coles noted that “graduates on more typical salaries could end up with bigger bills,” pointing specifically to the extended repayment window as a key factor. The implications extend beyond monthly finances, potentially influencing long-term decisions such as home ownership and retirement planning.
According to the same source, carrying student debt for decades may affect mortgage affordability assessments and reduce flexibility in pension contributions later in life. The issue also raises questions for families considering financial support, as the likelihood of full repayment reduces the previous assumption that some debt would eventually be written off.
Applications for student finance are currently open, with a deadline of May 15 for those planning to begin courses in September. According to AJ Bell, early planning and long-term financial preparation are increasingly important under the new system.
