Student Loans Explained

That huge student loan balance? It may not matter as much as you think

£30,000. £50,000. £70,000.

Seeing a student loan balance that large can be terrifying.

But here is the bit that often gets missed:

Your monthly repayment is not based on how much you owe. It is based on how much you earn.

That changes the conversation completely.

It is not a normal loan

Despite the name, a student loan does not work like a mortgage, credit card or bank loan.

In most cases:

• You only repay when your income is above a set level.
• Your repayments rise and fall with your earnings.
• If your income drops below the threshold, your repayments stop.
• Any balance left after a set period is usually written off.

Two graduates on the same repayment plan and earning the same salary could owe completely different amounts and still make exactly the same monthly repayment.

So please do not panic simply because the balance looks enormous!

What about Plan 2 and Plan 5?

There have been plenty of worrying headlines about Plan 5 student loans.

Plan 5 generally applies to students in England who started university from August 2023. Graduates start repaying at a lower income than under Plan 2 and could continue making repayments for up to 40 years rather than 30.

That does sound worse.

However, Plan 5 interest is linked to the Retail Prices Index, often shortened to RPI. This measures how the prices of everyday goods and services are changing.

Why does that matter?

If the loan balance rises at roughly the same rate as prices generally, the amount owed should not really be getting bigger in ‘real’ terms.

For example, £100 today will not buy as much in the future because prices tend to rise over time. If a £100 debt rises at a similar rate, the number becomes larger, but its real value — what that money can actually buy — stays broadly similar.

Under Plan 2, interest can be as high as the Retail Prices Index plus an additional 3%. This means the balance can grow faster than prices generally, which is why some Plan 2 graduates have watched the amount they owe increase significantly even while making repayments.

So Plan 5 is not automatically ‘worse’. It could mean paying for longer, but the way interest is calculated is more favourable.

What someone actually repays over their lifetime will depend largely on how much they earn.

Should you pay it off early?

Possibly — but definitely not just because you hate seeing the balance!

Making extra payments may make sense for a higher earner who is likely to repay the whole loan.

For many other people, however, paying thousands of pounds off the balance may not reduce their required monthly repayments at all. Some of the remaining loan might eventually have been written off anyway.

Before overpaying, ask what else that money could do for you.

Could it help you:

• Build an emergency fund?
• Save towards your first home?
• Start a pension or long-term investment?
• Avoid more expensive debt?
• Enjoy life a little?

Your student loan is only one part of your finances. Do not let the biggest number automatically become your biggest priority.

If you are considering making a large payment, speaking to a financial professional first could provide a useful reality check.

Surviving financially at university

Of course, the loan balance is only half the story. You also need to make the money last while you are studying.

A maintenance payment can make you feel surprisingly wealthy on the day it arrives — but unfortunately, it has to last until the next one!

Many people find it useful to turn the total into a weekly amount.

You could start by adding up the money coming in, including your maintenance loan, earnings, family support, bursaries and savings.

Then take away your essential costs, such as rent, bills, food, travel, phone and course costs.

Finally, divide what is left by the number of weeks until your next payment.

Suddenly, “I have £1,200” becomes “I have around £100 a week”.

For some people, that feels like a much more useful number when deciding what they can comfortably afford.

A few habits that really help

You do not need an elaborate spreadsheet or a colour-coded budgeting system.

A few simple habits may help:

• Use student discounts — but only on things you actually wanted to buy!
• Plan some meals before shopping.
• Check your subscriptions regularly.
• Look at your bank balance rather than hoping for the best.
• Consider moving money needed for later in the term out of your everyday account (even better if it is earning interest in an instant access savings account).
• Keep a little aside for unexpected costs if you can.
• If you have a job, decide what you would like those earnings to be used for.

Good money management is not about spending as little as possible or feeling guilty every time you buy a coffee.

It is about knowing what you can afford, spending without panic and making your money work for the life you want.

And that is a useful skill long after university is over.

The important thing with student loans is to understand how your own plan works rather than being frightened by the headline balance. The rules depend on when and where you studied and can change, so it is always worth checking the latest information from the Student Loans Company or GOV.UK before making any big decisions.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.