MB
Mustafa Bilgic
Financial content writer specialising in UK student finance, graduate salaries, and personal tax. Updated February 2026.
UK Student Loan Plans Explained
The UK student loan system operates on an income-contingent basis: repayments are automatically deducted from your salary via PAYE (or self-assessment) only when you earn above a specific threshold. Repayments are calculated as a percentage of income above the threshold, not on the total loan balance.
Plan 1
- England/Wales: started before Sept 2012
- Northern Ireland: all students
- Threshold: £26,065/year
- Rate: 9% above threshold
- Interest: lower of RPI or BoE base +1%
- Written off: age 65 or 25 years
Plan 2
- England/Wales: Sept 2012 – July 2023
- Threshold: £28,470/year
- Rate: 9% above threshold
- Interest: RPI + up to 3% (income-linked)
- Written off: 30 years after first April repayment year
Plan 4 (Scotland)
- Scottish students at Scottish universities
- Threshold: £32,745/year
- Rate: 9% above threshold
- Interest: RPI only
- Written off: age 65 or 30 years
Plan 5 (New System)
- England/Wales: from Sept 2023
- Threshold: £25,000/year
- Rate: 9% above threshold
- Interest: RPI only
- Written off: 40 years after first April repayment year
Postgraduate Loan
- Masters/PhD loans (England/Wales)
- Threshold: £21,000/year
- Rate: 6% above threshold
- Interest: RPI + 3%
- Written off: 30 years
- Repaid alongside Plan 2 if applicable
Monthly Repayment Examples
| Annual Salary | Plan 1 (£26,065 thresh) | Plan 2 (£28,470 thresh) | Plan 4 (£32,745 thresh) | Plan 5 (£25,000 thresh) |
|---|
| £25,000 | £0.75/mo | £0/mo | £0/mo | £0/mo |
| £28,000 | £23/mo | £5/mo | £0/mo | £23/mo |
| £32,000 | £53/mo | £35/mo | £4/mo | £52/mo |
| £40,000 | £113/mo | £95/mo | £64/mo | £113/mo |
| £50,000 | £189/mo | £170/mo | £140/mo | £188/mo |
| £60,000 | £264/mo | £245/mo | £215/mo | £263/mo |
Plan 2 Example: £30,000 salary
Annual repayment = (£30,000 − £28,470) × 9% = £2,705 × 9% = £243.45/year = £20.29/month. With a £45,000 balance at 7.3% interest, the loan grows by ~£3,285/year in interest, exceeding repayments. The balance increases, not decreases, until salary rises significantly.
Important: For most Plan 2 graduates on average UK salaries, the student loan functions more like a graduate tax than a traditional loan. The majority will never repay the full amount before the 30-year write-off. The IFS estimates only around 25% of Plan 2 borrowers will repay in full.
Plan 2 Interest Rate: How It Works
Plan 2 has the most complex interest structure of all student loan plans. The interest rate is linked to RPI (Retail Price Index) and varies based on your income:
- While studying: RPI + 3% (the maximum rate)
- After graduating, earning up to £28,470: RPI only (0% real-terms interest)
- Earning £28,470–£49,130: Interest scales linearly from RPI to RPI + 3%
- Earning above £49,130: RPI + 3% (the maximum)
Interest rates change on 1 September each year. The current Plan 2 rate is approximately 7.3% (as of 2025). This means the loan can grow quickly in early career years when salaries are lower.
Plan 5: The New System from 2023
Students starting at English or Welsh universities from September 2023 onwards are on Plan 5. Key changes from Plan 2:
- Lower threshold: £25,000/year (vs £28,470 for Plan 2) — meaning repayments start earlier
- Lower interest rate: RPI only (no additional 3%) — but the lower threshold means more interest accrues relative to repayments for many borrowers
- Longer write-off period: 40 years (vs 30 years) — much longer before any outstanding balance is cancelled
- Higher total repayments: The IFS estimates most Plan 5 borrowers will repay significantly more than Plan 2 borrowers over their careers
Should You Make Voluntary Overpayments?
For most graduates, voluntary overpayments on student loans are not financially advisable. Here is why:
If you are on Plan 2, have a large loan balance (e.g. £40,000+), and your projected earnings suggest you will not repay the full balance in 30 years, then any overpayment simply reduces a debt that would be cancelled anyway. You would be better off putting that money in a savings account, ISA, or pension.
Overpayment only makes financial sense if you are certain you will repay the full loan before write-off — typically high earners with loans under £30,000. Use the year-by-year projection in this calculator to assess whether you fall into this category.
Does Your Student Loan Affect Your Mortgage?
Your student loan does not appear on your credit file and does not directly affect your credit score. However, monthly student loan repayments do reduce your take-home pay, which affects mortgage affordability assessments. Lenders calculate your disposable income after all commitments including student loan repayments. A higher loan repayment means lower assessed borrowing capacity.
The impact is typically modest for average earners — a £30/month repayment reduces the mortgage you can be offered by approximately £6,000–£9,000 depending on the lender's income multiple.
Student Loan and Self-Employment / Self-Assessment
If you are self-employed or have income above £100,000 (which triggers self-assessment), your student loan repayments are calculated and collected through your annual Self-Assessment tax return rather than through PAYE. You declare your income and HMRC calculates the repayment. Underpayment in-year (e.g. if you earned more than expected) is collected via the tax return.
Frequently Asked Questions
What is the difference between UK student loan plans?
Plan 1 applies to students from England and Wales who started before September 2012 and all Northern Ireland students, with a threshold of £26,065 and write-off at age 65 or after 25 years. Plan 2 covers England and Wales students from 2012 to 2023 (threshold £28,470, write-off after 30 years). Plan 4 is for Scottish students (threshold £32,745). Plan 5 is for new students in England and Wales from September 2023 (threshold £25,000, 40-year write-off). Each has different interest rates and write-off timelines.
Do most people repay their student loan in full?
No. Most Plan 2 borrowers are projected not to repay their loan in full before the 30-year write-off. The Institute for Fiscal Studies (IFS) estimates only around 25% of current Plan 2 borrowers will fully repay. Under Plan 5, the 40-year write-off period means even fewer are expected to fully repay, but total repayments over a career will be significantly higher for many borrowers due to the lower repayment threshold.
Does not repaying my student loan damage my credit score?
No. UK student loans (Plan 1, 2, 4, and 5) are not reported to credit reference agencies. Your outstanding balance and repayment history do not appear on Experian, Equifax, or TransUnion reports. Unpaid balances have no effect on your credit score. Repayments are automatically collected through PAYE and only trigger when your income exceeds the plan threshold. There is no arrears system, no debt collection, and no credit impact.
What happens to my student loan if I go below the repayment threshold?
If your income falls below the repayment threshold (for example during unemployment, a career break, maternity/paternity leave, or part-time work), your student loan repayments automatically stop. No manual action is required — it is all handled through payroll. When your income rises above the threshold again, repayments resume automatically. During any non-repayment period, interest continues to accrue on the outstanding balance, so the total amount owed can increase.
Should I make voluntary overpayments on my student loan?
For most borrowers, no. If your projected earnings suggest you will not repay the full balance before the write-off date, any voluntary overpayment reduces a debt that would be cancelled anyway — financially equivalent to throwing money away. You are better off saving that money in an ISA or pension. Overpayment only benefits you if you are certain to fully repay before write-off — typically those with smaller loan balances (under £30,000) and higher salaries. Use the year-by-year projection tool above to model your specific situation.
Is student loan interest charged while I am studying?
Yes. For Plan 2, interest accrues from the day your first student loan payment is made. While you are studying, the rate is RPI + 3% (the maximum rate). Once you graduate and start repaying, the rate depends on your income: from RPI only (on earnings at or below threshold) up to RPI + 3% (on earnings above £49,130). For Plan 5, the rate is RPI only both during and after study. For Plan 1, the rate is the lower of RPI or Bank of England base rate + 1%. Interest rates update annually on 1 September.
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