Currently, for graduates with “Plan 2” loans, repayment only starts when their income reaches £27,295 per year.
Those earning less do not pay anything towards their loan. This situation highlights a broader issue within the student loan system, especially since student debt has become a significant financial burden for many.
How Long Until Loans Are Paid Off?
Given current wages and loan structures, it’s estimated that a significant number of graduates will never pay off their loans in full before the balance is eventually written off. For “Plan 2” loans taken out after 2012, the government will write off any remaining debt 30 years after the borrower’s first April following graduation.
This means that many low to moderate earners are unlikely to ever clear their loan balance, especially if their income remains near or below the threshold throughout their careers.
Average UK Wage vs. Student Loan Debt
The average wage in the UK is approximately £33,000, though this figure can vary depending on the industry and region. In contrast, the average student debt has steadily risen and now often exceeds £45,000, with some graduates carrying even larger debts depending on their course duration and whether they took out maintenance loans.
This disparity between income and loan size makes it challenging for many to make significant repayments, especially given that a portion of monthly income is already dedicated to essential living expenses.
Monthly and Annual Repayments
For those earning over the threshold, student loan repayments are calculated at 9% of any income above £27,295. For example, if a graduate earns £30,000 a year, they would repay around £243 annually or roughly £20 per month.
Higher earners will see larger deductions, but those close to the threshold will find their repayments relatively small. While this structure helps graduates with lower incomes, it also means that, for many, repayments barely cover the interest accruing on the loan, making little progress toward reducing the balance.
Repayment Options and Choices
Graduates have a few options for managing their student loans. Those with disposable income can make additional payments to pay down the loan faster, which can reduce interest over time. However, for graduates with lower wages, sticking to the minimum income-based repayments in the form of installment loans might be the only feasible option. While early repayment might sound beneficial, graduates often weigh the long-term impact and may choose to focus on other financial priorities instead, especially given that any unpaid loan balance will eventually be written off.
The Debate on Loan Write-Offs
For many, the prospect of never fully repaying their loan essentially turns it into a long-term tax rather than a traditional loan. This situation has sparked debate about potential reforms to the system, such as lowering the interest rate, increasing the threshold, or restructuring loan forgiveness.
Graduates facing ongoing debt burdens often call for a system that provides clearer pathways to either pay off loans or find a more manageable approach to handling debt over time.
The student loan system in the UK thus represents both a relief for those in lower-income brackets but also a substantial financial consideration that many will manage throughout their working lives.