New undergraduates to pay up to twice as much for a university education: What do the new Plan 5 loans mean for students?

In February, the Department for Education announced reforms to Student Finance England in the form of the new Plan 5 loans for undergraduates, with the aim of creating a system “fairer for taxpayers and for students”.

It consists of a lengthy extension to the repayment period, and a lower threshold before graduates begin servicing this debt that has translated into a projected two-fold increase in the total amount graduates will pay over their lifetime.

The good news is that the changes will only affect those whose courses began after August this year that is for this year’s freshers. Students from Scotland, Wales, and Northern Ireland have also secured a lucky escape here and will continue on their nations’ respective schemes.

Under the current system, only about 1/4 of graduates ever repay their loans in full. Ultimately, taxpayers take on approximately 44p for every £1 issued in student loans. The government’s impact assessment for the new Plan 5 loans, however, estimates that this will fall below 20p – and possibly as low as 11p in the long term, significantly reducing the burden on the public purse. Furthermore, the IFS forecasts that 70% of those under this new system will fully repay their student loans.

The most significant change is the decade-long extension to the repayment period. Graduates will now be responsible for their student debt for 40 years (previously 30), meaning most will now be into their sixties before any remaining money owed is forgiven.

Paying throughout their fifties, generally the point where people are at the peak of their careers and therefore earning at their highest, translates into a doubling of the estimated revenues from loan repayments for the government. Through harnessing this substantial proportion of lifetime income, the strategy seeks to transfer the burden away from the taxpayer, and onto graduates.

Furthermore, the threshold has been lowered meaning graduates will now begin contributing once earning over £25,000 (previously £27,295). This means that a current first year, earning £28,000 in the future would repay £23 monthly, compared to a mere £5 for their older counterparts.

There is, perhaps, one silver lining; interest on the current Plan 2 loans is charged at 3%, plus the retail price index, and will be cut to just RPI for the newest undergraduate students, somewhat reducing the pressure of monthly payments on budgets.

Student loan repayments will continue to work similarly to taxation in that graduates contribute 9% of their earnings over the threshold, as part of Pay As You Earn (PAYE). The changes apply to both maintenance and tuition loans; the latter will continue to be capped at £9,250 in England for home students until 2025/26.

The plans come in conjunction with efforts by the Department for Education to reduce the number of school leavers entering ‘low-value’ courses – classified as those that fail to produce high-earning graduates in professional careers, as it becomes more expensive to go to university.

The argument of the government hinges on the view that many Bachelor’s degrees, particularly in the humanities and arts, are not offering sufficient value to society for qualifications that, at least historically, the taxpayer has effectively subsidised. The DfE claims that the move will aid in ‘ensur[ing] value for money for the taxpayer’ by placing greater responsibility on students themselves for university funding.

It is a claim that has been contested by experts in education, such as Gavan Conlon, who suggest the rising cost of higher education will discourage students from working class and other traditionally underrepresented backgrounds from applying to university. Conlon also warns that the reforms disproportionately benefit the richest grads; the highest earners are likely to pay off their loans early whilst low and middle-income workers will still face this ‘tax’ until much later in life.

Chloe Field, Vice President of Higher Education at the National Union of Students (NUS) noted how this could potentially exacerbate existing inequalities where there are significant pay gaps. She commented, “female graduates will end up paying more money over their lifetime because of the lower repayment threshold and longer repayment period”.

The announcement from the Department for Education has been unpopular to say the least, and only time will tell as to whether its ramifications will align with the government’s mission to deliver truly high-value university educations.