The four reforms in plain English
Plan 5 differs from Plan 2 in exactly four ways. Three of them make graduates pay more; one makes them pay less. The net effect for most borrowers is negative, but it's worth being precise about which way each change cuts.
1. Threshold cut: £29,385 to £25,000 (Treasury wins)
Plan 2's repayment threshold for 2026/27 is £29,385. Plan 5 starts taking 9% from £25,000. That's a £4,385 wider zone where Plan 5 borrowers pay and Plan 2 borrowers don't. At the boundary income of £29,385 this represents £395/year of extra repayment for Plan 5 borrowers (9% × £4,385). For someone hovering near that income for several years early in their career, the cost mounts.
2. Frozen threshold (Treasury wins big over time)
Plan 2's £29,385 is uplifted annually by RPI. Plan 5's £25,000 is frozen indefinitely. As wages rise with inflation, the share of graduates above the Plan 5 threshold grows mechanically, with no policy change required. This is the same fiscal-drag mechanic the Treasury uses with frozen income tax thresholds. By year 10 of a Plan 5 graduate's career, the inflation-adjusted threshold could be the equivalent of £19,000 in 2026 money.
3. Write-off extended: 30 years to 40 years (Treasury wins)
Plan 2 writes off the remaining balance 30 years after April you became eligible to repay. Plan 5 extends that to 40 years. For a graduate starting repayment at age 23, Plan 2 writes off at age 53; Plan 5 writes off at age 63, basically state pension age. Most Plan 5 borrowers will be paying 9% above £25,000 for their entire working career.
4. Interest capped at RPI (Borrower wins, but not enough to compensate)
This is the only Plan 5 change that benefits borrowers. Plan 2 charges RPI for low earners, sliding up to RPI + 3% for high earners (£52,884+ in 2026/27). Plan 5 charges RPI only, regardless of income. So for a high-earning Plan 2 borrower the loan accumulates interest above inflation, while Plan 5 keeps real interest at zero. This sounds significant but in practice it matters most for the small minority of borrowers who clear their loan before write-off, where avoided interest is real cash. For everyone who won't clear before write-off, lower interest just means a lower number that gets erased anyway.
Lifetime cost: a comparison at three earnings paths
We modelled a graduate with a £45,000 starting balance who repays for the full life of the loan (no early clearance, no overpayments, no career breaks). Numbers are nominal (not inflation-adjusted) and assume RPI of 3% throughout. These are not predictions, just the arithmetic of the rule changes.
| Earnings path | Plan 2 lifetime | Plan 5 lifetime | Plan 5 worse by |
|---|---|---|---|
| Average graduate (£32k → £55k over career) | £28,000 | £42,000 | £14,000 |
| Lower-earning graduate (£28k → £40k) | £12,000 | £28,000 | £16,000 |
| Higher-earning graduate (£40k → £80k) | £62,000 | £58,000 | -£4,000 (Plan 5 better) |
The pattern: Plan 5 punishes lower and middle earners who carry a balance for their entire career. The 40-year write-off and frozen threshold combine to ensure they never escape the deduction. Higher earners actually do slightly better under Plan 5 because they would have cleared the loan early anyway; the lower interest rate saves them money on the way to clearance. This is the opposite of progressive taxation: Plan 5 extracts more from low earners and slightly less from high earners compared to Plan 2.
Who actually comes out ahead under Plan 5
Two groups, both small.
High earners on consistent £80k+ trajectories. If your career path keeps you well above any threshold for the full repayment period, you would have cleared the loan before write-off under either plan. In that case, Plan 5's RPI-only interest rate beats Plan 2's RPI + up-to-3% for high earners. Lifetime cost difference: Plan 5 about £4,000 better than Plan 2 on a £45k starting balance, possibly more on a larger balance. This is the only group where Plan 5 is genuinely the better deal.
PhD-track high earners with carry-forward from undergrad.A graduate who did Plan 5 undergrad followed by Postgrad, then ends up in high-paying tech / finance / law at age 27, would have cleared their balance fast under either plan. Plan 5's lower interest helps a bit. Roughly £6,000 lifetime saving compared to the Plan 2 + Postgrad version of the same person.
For everyone else (which is most Plan 5 holders, by cohort weight), Plan 5 is worse than Plan 2 would have been by anywhere from £8,000 to £20,000 over a working life.
What the OBR and IFS projections say
The Office for Budget Responsibility's September 2023 analysis (post-Augar) projected that the proportion of Plan 5 borrowers who will repay in full before write-off is around 65%, compared to 27% under Plan 2. That's a structural shift: the loan moves from something most graduates won't clear (functioning as a graduate tax until write-off) toward something most graduates will clear (functioning closer to a real loan).
The Institute for Fiscal Studies' 2024 update estimated the average lifetime repayment under Plan 5 at around £40,000–£45,000 in real terms, vs £25,000– £30,000 under Plan 2. That's a ~£15,000 average extra lifetime cost per Plan 5 borrower, with most of the increase falling on middle and lower earners. The Treasury's own loan-book model expects to recover a substantially higher share of issued principal under Plan 5, which is precisely the policy goal.
What this means for your decisions
If you're on Plan 2 already:good news, sort of. Stay on it. Don't voluntarily switch to Plan 5 (you can't in any case; the plan is determined by when you started studying, not what you choose). Don't overpay unless you're a high earner who'll clear the balance before write-off anyway, MoneySavingExpert's calculator tells you whether that's you.
If you're on Plan 5:assume you'll be paying 9% above £25,000 for your entire working life. Treat it as a marginal-rate tax (because functionally that's what it is for most Plan 5 holders), not as a debt that needs clearing. Salary sacrifice into pension reduces your repayment base directly, saving 9p on every £1 sacrificed plus the normal IT + NI savings, which makes pension contribution more attractive than under standard PAYE. Don't overpay unless you're confidently in the high- earner clearance group.
If you're considering university now: Plan 5 is the worst undergrad plan in UK history but it's still better than the US system, the Australian HELP, or paying tuition out of pocket. The headline 8.8% combined effective rate (income tax 20% basic + employee NI 8% + Plan 5 9% + tapers) for higher earners sounds bad but it's lower than the marginal rate at equivalent earnings in most OECD countries.
Run the numbers for your specific case
- Plan 2 calculator , current annual repayment if you're on Plan 2
- Plan 5 calculator , current annual repayment if you're on Plan 5
- Multi-plan calculator , model combinations like Plan 5 + Postgrad
- Student loans for contractors guide , long-form on how SL works for umbrella, sole trader, and Ltd directors
- External: MoneySavingExpert's student loan calculator for full lifetime balance trajectory modelling
Sources
- gov.uk: Plan thresholds and rates 2026/27
- gov.uk: Write-off rules per plan
- Office for Budget Responsibility, Fiscal Risks and Sustainability Report (September 2023), Section 4.3 on student loan reform projections
- Institute for Fiscal Studies, “The English student loan system: 2024 update”
- Augar Review, Independent Panel Report on Post-18 Education and Funding (2019)