The government have recently announced changes to student loans, but the big question is, what are they and how will they affect you?
So, how do student loans work?
For dentists in employment, the repayments are collected by HMRC via the PAYE system i.e. by deduction from your monthly salary, pre-tax if your salary is above the relevant monthly student loan threshold.
For dentists who are self-employed, the amount you repay is dependent upon how much of your pre-tax profit exceeds the student loan salary threshold. The student loan repayment is paid with your Income Tax and National Insurance payments each January.
The student loan salary threshold varies depending on the repayment plan you are on.
What plan am I on?
In the UK, there are four student loan repayment plans that apply to UK and EU citizens.
Plan 1 – You’re on Plan 1 if you are:
- an English or Welsh student who started an undergraduate course anywhere in the UK before 1 September 2012
- a Northern Irish student who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998
- an EU student who started an undergraduate course in England or Wales on or after 1 September 1998, but before 1 September 2012
- an EU student who started an undergraduate or postgraduate course in Northern Ireland on or after 1 September 1998
Plan 2 – You’re on Plan 2 if you are:
- an English or Welsh student who started an undergraduate course anywhere in the UK on or after 1 September 2012
- an EU student who started an undergraduate course in England or Wales on or after 1 September 2012
- someone who took out an Advanced Learner Loan on or after 1 August 2013
Plan 4 – You’re on Plan 4 if you are:
- a Scottish student who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998
- an EU student who started an undergraduate or postgraduate course in Scotland on or after 1 September 1998
Postgraduate Loan – You’re on a Postgraduate Loan repayment plan if you are:
- an English or Welsh student who took out a Postgraduate Master’s Loan on or after 1 August 2016
- an English or Welsh student who took out a Postgraduate Doctoral Loan on or after 1 August 2018
- an EU student who started a postgraduate course on or after 1 August 2016
How much will I repay and what are the changes?
The changes, or freezes in some cases, will affect how much you repay. From 6 April 2022, the following changes will come into effect;
Plan 1 – The Plan 1 student loan repayment threshold will increase from £19,895 to £20,195 a year. If you are on this plan, you repay at 9% above the threshold.
Plan 2 – The Plan 2 student loan repayment threshold was due to increase from £27,295 per year (£2,275 per month) to £28,550 (£2,379 per month). However, the government have frozen the threshold at £27,295 from 6 April 2022. This will mean that you will now pay £113 a year more than if the threshold had not been frozen. If you are on this plan, you repay at 9% above the threshold.
Plan 4 – As with plan 1 there is an increase in the Plan 4 student loan repayment threshold from £25,000 to £25,375 a year from April. If you are on this plan, you repay at 9% above the threshold.
Postgraduate Loan – For these with postgraduate loans, the student loan payback threshold has been frozen at its current level of £21,000 a year (£1,750 a month), instead of rising to £21,960 as expected. This will mean that you will now pay £87 a year more than if the threshold had not been frozen. If you are on this plan, you repay at 6% above the threshold.
Are student loan interest rates rising?
Each of the 4 student loan plans have a different interest rate.
The interest rate charged on Plan 1 and Plan 4 student loans is currently 1.5%, but this is likely to be uplifted to 1.75% in the coming months as the interest rate is the lower of Retail Price Index (RPI) from March of the same year (1.5% in March 2021 and March 2022 RPI will be higher than this once released) and Bank of England base rate plus 1% – Bank of England base rate is currently 0.75%.
The interest rate charged on Plan 2 student loans varies depending on your annual income. For those with an annual income of £27,295 or less, the interest rate is set at RPI, whereas those with annual income of £49,130 or more, the interest rate is RPI plus 3%. If your annual income is between £27,296 and £49,130 your interest rate will be between RPI and RPI plus 3%.
The government can also apply an interest cap to ensure the interest being charged is not at a higher rate than the average found in the commercial market – the latest Prevailing Market Rate was 6% in February 2022. This has been used by the government in the last year to cap the interest rate being charged on Plan 2 student loans. In September 2020, the maximum interest rate was 5.3% but this reduced to a low of 4.1% in October 2021 so interest rates have fallen over the last 12 months.
The RPI rate used for Plan 2 student loans is now 1.5%, resulting in the maximum interest rate being 4.5% from 1 March 2022.
The interest rate on postgraduate student loans is the RPI plus 3% and currently set at 4.5%.
However, on 13th April 2022, the Institute of Fiscal Studies announced that the interest rate for Plan 2 and postgraduate student loans would rise to a maximum of 12% in the Autumn. This follows the announcement of the RPI for March 2022 rising to 9%! There have already been calls by various groups for the Government to change the interest cap policy so that the cap can be implemented much more quickly than it currently is. Under the current policy, it can take 6 months from the date the increase in interest rate is implemented (1st September 2022 will be the date the higher interest rate will be implemented) for the cap to be put in place, meaning dentists with plan 2 student loans could face up to 6 months of interest at up to 12% on their student loans.
Changes from September 2023 for new university starters
A recent announcement effecting those starting university in September 2023 will see the biggest shakeup since Plan 2 student loans were introduced in 2012. The main changes are:
- The student loan threshold for repayment will be reducing from £27,295 (current Plan 2 threshold) to £25,000.
- Graduates will need to repay their loans for up to 40 years, rather than the 30 years that is currently in place for Plan 2 student loans.
- However, interest rates will be lower than Plan 2 student loans, with the interest rate set at RPI instead of RPI + up to 3%.
These changes won’t be introduced for current students or graduates with Plan 1, 2 or 4 student loans. It is expected that these changes will result in higher earners paying off their student loans more quickly compared to higher earners with Plan 2 student loans.
Should I pay off my student loan?
Having enough expendable income to pay off your student loan in larger portions may interest you, however it is important to fully understand the pros and cons to doing this.
UK student loans aren’t like any other form of debt, and it needs real consideration as to whether it is beneficial for you to pay off your student loan, particularly before other types of debt. If you never earn above the student loan repayment threshold, you will never have to pay off your student loan, and most plans have an expiry date, at which point the loan is wiped (this varies from plan to plan). It is important to be aware that student loan debt is also wiped on death and does not form a debt of your estate.
Dentists who have a plan 2 student loan in particular, should carefully consider if they should pay off their student loan more quickly. With interest being charged on the loans throughout your study, many dentists will have student loan balances in excess of £70,000 before they start repayments. An associate dentist earning the average profit for an associate (per NASDAL statistics) with a £70,000 student loan debt would not repay their student loan within 30 years, despite making repayments of over £90,000. Deciding on whether extra repayments should be made will depend on your own personal earnings and circumstances and won’t be the right decision for everyone.