UK Student Loans – SB or BS ?

UK Student loans, and more particularly the repayment of them, is a hot topic in the news at the moment. 

There are particular concerns about the affordability of the legacy (i.e. Plan 2) scheme which still applies to all loans taken out before August 2023. The terms of this loan scheme has resulted in crippling interest rates due to the built-in 3% surcharge above RPI, and the recent and quite prolonged spike in inflation. The government is under pressure to act on this, and many are even starting to question whether a university education is really still 'value for money' in the 2020s, given the high cost, and the poor quality of some of the courses offered.

To help crystallise ideas for the prospective (or indeed established or ex-) student, I thought now would be a good time to take a closer look at the ‘nuts and bolts’ repayment side of things. 

In particular, one question that regularly comes up is:  “…Should I or shouldn't I over-pay in order to reduce the balance I owe ?...”. I’ll attempt to provide some answers to this, and other questions.

As anyone who has been exposed to it will testify, the Student Loan system is quite complex. The scheme isn’t really a conventional loan in the true sense, but a rather unhappy hybrid between a conventional mortgage-type payback loan and a government ‘tax on learning’. There are a number of variables which are subject to change from year to year, and the financial outcomes for the student will differ depending on their level of income, and when their loan was taken out, making it even less comprehensible to the novice. To help put some ‘flesh on the bones’, I've generated a simulator app to model various situations and hopefully help answer the overpayment question I’ve raised above.

You'll find the app on my website’s Student Loans page as an embedded Excel insert – download it and try it yourself - I guarantee you'll be surprised...and probably quite shocked at the amount the government will be ‘milking’ from your salary payments during the 30 (or 40) year term over which you'll be repaying your loan. (NB although you can use the simulator online via Google Sheets, I'd recommend you download the file to your own pc– it makes for a smoother ride....)

Whatever the merits or otherwise of the scheme for the student, it’s a veritable 'cash cow' for the treasury, for sure.

I won't attempt to go through all the rules which apply here - you'll find these online e.g. the government website's own section on repayments .

You’ll also find some additional explanation in the form of comments within the app itself (red triangles at the corner of the input cells). 

How do today's loans stack up as far as payback payments go?

A quick look at the figures the calculator comes up with for an 'average' £50,000 loan balance with the current earnings threshold of £25k and a 9% p.a. repayment rate, and using the current (Plan 5) rules, it becomes apparent just how much the interest, and thus the debt balance (the amount displayed on the y axis of the graph) builds up over the years with the current RPI 'average' value of 3%. Fortunately, you don't have to pay this interest back monthly, but it does accrue in your loan balance as soon as your payments start coming in (and not just when you start paying the loan back).

A typical additional question asked might be: I’m expecting to be quite hard up when I first start working - what can I do to minimise repayments / interest ?

Here are some recommendations on strategy for minimising your payments once you finish your course and your earnings rise above the salary threshold:

 Plan 5: This is the current plan applicable to any loans started after August 2023. As you might expect, the scheme is designed such that middle earners (i.e. those earning in the salary range between £30k and £60k during the full loan payback period) will be required to repay the whole of their loan plus any interest accrued. As we’ll discuss later, Reeves’ recent freezing of the payment threshold will ensure that even more lower-income ex-students will end up paying virtually everything off after 40 years, and this is one of the main criticisms from the scheme’s ‘victims’. The inevitable gradual rise in the minimum wage, and salaries generally, will also take its toll.

 Middle range earners (£30k-£70k): This is probably the group of potential ‘customers’ with the largest membership. The only reason for making extra payments for those in this group would be to pay off the debt more quickly and thus minimise extra interest accrued over time. To make this worthwhile, a substantial extra payment (e.g. £250 p.c.m.) would be needed, since the majority of the interest burden lies during the early years. Paying this amount extra monthly would save ca £26k in interest by paying off the loan in ca 11 years rather than the 35years it would otherwise take, but the snag is that the extra outlay might not be affordable early on in your career.

 Lower range earners: For an earner at the low end of the scale e.g. £25k-£35k range, the majority of the residual debt would be written off under plan 5 (ca £35k) and repayments would only amount to ca £18k. Thus the strategy for this group should be to avoid throwing good money after bad by paying any extra. A further reduction in repayments due could also be achieved by splitting work into more than one employment (this is quite common for those early in their careers and working part-time nowadays). Repayments are assessed on each employment separately, thus you could still earn up to £24999 from each of 2 separate jobs and still repay nothing. (Note, though, that as we’ll see later, the minimum wage will have almost reached the lower threshold for a full-time worker, and will no doubt rise above it before the end of this parliament.)

 Higher range earners: Here the position is more clear-cut - you'll inevitably have to repay the whole of your loan within the 40-year write-off period, to minimise the interest you accrue. Thus your strategy should be to pay off the remaining debt as quickly as you can afford to (or even avoid using the scheme at all). Someone starting at £40k and finishing at £80k would take ca 22 years to pay off their debt, accruing nearly £20k in interest. Paying extra off at our figure of £250 per month would save them ca £11500 in interest and pay off the debt 13 years sooner. Those lucky enough to have access to the 'bank of mum and dad' and able to pay off the whole balance via a lump sum would do even better; any interest paid to the parents would also remain 'in the family', (and would probably form part of their inheritance at the end of the day....assuming mum and dad hadn't spent it all on cruising and high-living before they went!).

Plan 2: This is the 30-year repayment 'legacy ' scheme which only applies to student loans taken out before 1st August 2023.  If you are unfortunate enough to have been landed with one of these, you'll probably already be paying it off, so would be advised to check your loan account to check your current balance remaining and payments before using the modeller. 

Although your strategy should be broadly similar to Plan 5, the shorter payment term would be expected to increase the likelihood of significant write-offs. The higher repayment rates attempt to compensate for this. The higher salary threshold will also help those on low incomes by reducing payback liability during your early years. Thus extra payments are only appropriate for the highest earners, e.g someone earning £40k-£70k would accrue £40k in interest charges over 25 years, and save themselves £26k by paying £250 pcm extra. A no-brainer for anyone who can afford it.....

But how can I assess how much I’m likely to be earning in 40 years time ?

A good question, and one which could catch quite a few people out in making their estimates. Actually, 40 years is quite a long time (more like 40 days in politics!), and the normal inflationary pay rises alone over a 40 year period would be expected to raise salary levels substantially. Given this government’s record, those working in the public sector are likely to benefit from super-inflationary rises, at least until 2029. The adult minimum wage of £12.71 per hour (from this April) will equate to £ 24403 p.a. for a full-time worker, assuming a 40 hour week for 48 weeks per year (i.e. just below Reeves’ frozen £25k threshold..I wonder why?!). If you plug this value into the calculator I’ve provided on sheet ‘Intcalcs’, you’ll see that after 40 years at an average 3% increase per year, your gross final income based on the minimum wage would work out to almost £80k p.a.! Even if the rate is nearer 2%, you would still be getting nearly £54k. (The stats for 2016 and 2025 were £6.70 and £12.21, respectively i.e. an 82.2% increase over 9 years or 9.1% per year, suggesting 3% is probably nearer the mark!). Beware of using too low an estimate…

 Last but not least, we should address the thorny question of whether a university education still all it’s cracked up to be….and, more to the point, is it worth saddling yourself with a lifetime of  debt repayments to get one ?

 Sadly, there are already quite strong indications that it isn’t…no longer is a 2:2 from a halfway decent university a guaranteed passport to a good job and a successful career that it once was – there is simply too much competition...and too few roles offering such stable careers. However good your degree result, today’s employers nowadays also want, and will favour, 'ready made' applicants with at least some first-hand experience in the area they’ll be working in, who can 'hit the ground running' without a lot of additional training. Indeed, a ‘stellar’ degree result and no experience can actually worsen your prospects for some of the more menial jobs you might have to resort to make ends meet while you’re hunting for something more permanent.

 The other issue of concern to anyone about to start a career (or even in the middle of one!) is the effect Artificial Intelligence (AI) will have on the jobs market. At present it’s still too early to tell, or what effect the inevitable AI ‘bubble burst’ will have on the pace of its development, but there are ominous signs that employers are already reducing staff levels in some of the more junior professional roles as a direct result of applying existing AI tools. Very few jobs will be immune to this particular ‘tide’, so it’s well worth taking a hard look at those roles that might be less at risk, and seeing whether any of them would suit your own interests.

After a long period where manual skills were looked down on (thanks largely to Blair’s efforts to get everyone on university courses on the nineties and noughties) we’re finally realising that we need more plumbers, electricians, (and particularly brickies!), now that all the Eastern European workers we depended on so much for cheap labour in the noughties and teens have gone home to get better wages and jobs. Apprenticeships are in demand now, but sadly not as well-funded or supported as they should be…or as well regarded by employers.  

The ideal situation for a young adult now would be to find a role they really have an interest in, offering paid apprenticeships or internships and which also includes training in-post and a guaranteed job at the end of it. The real ‘icing on the cake’ would be the possibility of further higher qualifications relevant to the job, and funded by the firm if you stay with them for a set period thereafter. You might even avoid the need for a student loan completely if you find one of these ‘golden opportunities!

Some roles admittedly do require a university degree (many of these need you to go higher still, with scientist posts requiring a PhD or at least an MSc for any chance of promotion, and Medicine being notorious for a long and tortuous period of training to reach even Junior Doctor (sorry, Resident) level.). Even these once highly-respected professions are now in the firing line from AI, and so perhaps a less ‘good bet’ career-wise than they once were.

 The one thing I’d counsel against is just drifting into a university course ‘for the sake of improving your job prospects’ – there’s absolutely no guarantee it will, and you may end up 3 years older and virtually unemployable as a result, with £50k+ of debt into the bargain.

It’s important by your mid-teens to have some idea of the career you’d like to follow after your education finishes, and you'll need to firm up on it well before starting A levels or equivalent in order to get the right combination of qualifications. Although this is a tough call for a teenager just starting their adult life, it’s critical for ensuring your adult education follows the right path for you, and gives you a better chance of ending up in a job you really enjoy. In short, find a niche for yourself as early as possible…and go for it.

The Verdict

In the inimitable words of R4’s Greg Foot and his ‘Sliced Bread’ series, then, “..do we think UK Student Loans are SB…or BS ?..”

On present evidence I would definitely tend towards the BS end of the spectrum. The scheme is little more than a thinly-disguised ‘tax on learning’, and carefully crafted to allow Reeves’ voracious exchequer to take as much more of our hard earned cash as she can. Given its complexities and hidden pitfalls, if I were a prospective student, I would literally ‘avoid it like the plague’ and seek my funding elsewhere.

So what’s to be done ?, I hear you ask.  Not a lot for now, apart from adding your voice to the many online protests. But the clamour for change is growing, and by June after the forthcoming by-election, and the next local election results, are in…who knows

We might even see another screeching u-turn before then…Labour are getting quite good at those.

First published 13.2.26