Plan 2 Student Loans Pod Extra: Stop the repayment freeze – and should you overpay?

0:00Hello, welcome to a special extra podcast all about Plan 2 student loans, where there is a body of anger growing up around the country and there's been much debate and stories covered on this. Now, Plan 2 student loans are for those from England who started university between the 2012-13 academic year and the 2022-23 academic year. And those from Wales who started university from the 2012-2013 academic year right and up until now. Much of the anger is about the amount of interest people are seeing on their statements. in some cases they're paying off a lot but still seeing the total amount that they owe grow and I get why people are annoyed about it.

0:44So what I want to talk through today is first of all I'm going to play you a Newsnight interview that I did with Victoria Derbyshire on the politics of this and then we're going to morph from the political to the practical about what it means for you and what you can actually do. Now it's very important to be clear we're talking only about Plan 2 student loans. Current English students who've started since 2023 are on Plan 5 loans. Their terms are different. The interest rate is lower, but they repay at a lower threshold and they repay for 40 years rather than 30 years. So it's wiped at a later date.

1:22And all that means, even though the interest rate is lower, the new Plan 5 loans likely mean most students going now will pay even more back than those on Plan 2. But we've covered that before and we will cover it again. Today, it's on Plan 2. So, as it's the podcast, let's play the theme tune and then we'll go straight into Victoria Derbyshire from Newsnight. I've got meals, I've got to pay.

1:49Martin Lewis is calling on graduates to write to their MP about their student loans. The founder of Money Saving Expert knows everything there is to know about this issue and it's a good thing because there is a lot of anger amongst students absorbing the changes announced in the last budget and in a moment we'll talk to a graduate and trainee paediatrician who now owes£20 ,000 more than what he initially borrowed despite paying off hundreds of pounds each month. So Martin I want to ask you first of all as I head over there why are so many up in arms? So there's a growing anger especially amongst those who have plan two student loans those who started in England and Wales in the 2012 to 2013 up to 2023 in England and still going in Wales now they're the loans that have above inflation interest added on top and I would say there are four reasons for the problem here the first is for now well over 40 years we've educated our youth into what we call the debt but never educated them about debt there should have been formal education at the point in senior school when you're applying for university and university should have done formal education in the first when you get there, so people understood this.

3:02Second, fiscal drag. Freezing of the tax thresholds means effectively people are paying more money in tax. Graduates are feeling that. Many of them are moving to the higher rate band far earlier than they would have done before. Third, the big one, inflation. Obviously, the cost of living is hard for everybody, but people on Plan 2 loans have above inflation loans that are linked to inflation. So when we've had high inflation, their interest rates have gone up and that has been particularly painful. And even though those rates have come down a little, well, you've still got a lot more now added on top of your loan, which makes it more difficult.

3:35And the final one is we're starting to see the graduate premium diminish. The extra money you earn from going to university, for some there isn't any, but for everybody has come down a little bit. And with the threat of AI to jobs, which is going to hit the professional classes most of all, that is looking even more scary for people in this particular cohort. And I think add that all together, that's the big picture. There's nuts and bolts too, but that's the big picture of anger. Can I hone in on something that was announced by the Chancellor in the budget, which is she announced the freezing of the repayment thresholds.

4:10What impact does that have? And also, is the government just allowed to do that and change the sort of terms of the contract? So the impact is everybody who is above the threshold will effectively pay more. It's frozen from 2027 to 2030. As a rough guess, and it's only a guess because I don't know what inflation will be, by 2030 you'll be paying£300 a year more than you do right now. It's another form of fiscal drag. It's a freezing of the threshold. So these graduates will be facing double drag in effect. And I think that's a real problem. It's also particularly dangerous for low and middle earning graduates because they will be paying more, but it won't affect what they pay in 30 years.

4:48They will just be paying more. the very highest earning graduates, they will be paying more each month because the repayment threshold is frozen. But because they will be clearly in the 30 years before the debt's wiped, they will actually pay less interest because of it. So arguably it's beneficial for the highest earners, but not for the majority. As to whether they can do this, well, look, in 2012, when these loans were launched, the Conservative government said, and these are contractual loans, your loan will rise the repayment threshold with average earnings from 2016-17. In 2015, they announced they were going to freeze it.

5:21I took legal advice over a judicial review at the time to try and take them to court and we did a big campaign to stop the freezing of the threshold. The government caved in and they increased the threshold at the time. I can tell you now the truth is I was very glad because my legal advice said you will not win. Really? You will not win. Okay. Now we tried to change this in 2016. We had a campaign that said there should be no negative changes for existing contracts. You want to change for future students, that's a political issue. But it's an issue of natural justice if you change them on the existing contracts.

5:56And these loans should be regulated by the FCA. Do you know we did a campaign and do you know who the MP who tried to do amendments in Parliament to support it was? Then he was just a not that well-known backbench opposition MP. His name is Wes Streeting. He is now the Secretary of State for Health. He is a big name. And he said no negative retrospective changes and it should be FCA rules. And now his colleague, the Chancellor, is freezing the repayment threshold. It shouldn't be happening. Right. What do you say about some people watching who will say, look, you want to go to university, you take out the student loan, you have to pay for the tuition fees, you pay for your own education and that's exactly how it should be you know what the terms are because okay you didn't know about the freezing of the repayment thresholds but you know what the terms are generally you signed up to it while the student loan system is called a loan system and works more like a tax most people are going to pay nine percent of what they earn for 30 years 70 to 80 percent regardless yeah you know it is a contractual loan you go abroad you have to pay it that's why it's not a tax it was a contract in the terms of that contract when people signed up they were told the repayment threshold would go up with average earnings.

7:10The maths was done on the back of that. I would say to anybody who's saying out there, well, hold on, people who didn't go to university are going to have to pay for these people. You can have that argument. I'm talking about natural justice. Freezing the repayment threshold is a breach of natural justice. It would not be allowed for any commercial lender. It would go against all forms of consumer law. It's a breach of contract. It's a breach of promise. And while I don't think technically there's a legal leg to stand on here, there's a moral leg to stand on, The Chancellor knows what she's done, so writing to her won't help.

7:39But if all these people, these Plan 2 graduates who are affected by it, write to their MPs and say, this isn't on, this isn't what we were promised. We've got a contract with you and you are unilaterally changing the terms. And you tell companies they can't do that, you shouldn't do it either. I think that's a pretty strong argument. Who funds higher education is a totally different story. OK, so that's your message to graduates. Write to your MP, put some pressure on. If Rachel Reeves is watching this evening, what would you say? I would say, Chancellor, you know, you know that you're doing this as fiscal drag as if student loans were a tax.

8:15But it's not a tax. It's a contract that the government signed with young people who had not been given any education on these loans. I do not think it is a moral thing for you to do to be freezing the repayment threshold in this way. It's not like tax that we know is variable. You didn't say the terms were variable. This isn't right. Please have a rethink. Martin Lewis, thank you very much. We are going to hear actually from Rachel Reeves right now because she defended the system. She said it was fair. You only pay it back if you can afford to do so. And obviously after a period of time, that gets written off entirely.

8:49So if you are able to get a job that pays a good wage, you'll pay that money back quicker. But if you're never able to repay, that loan will eventually be written off. I think that is a fair system. Around half of people go to university today, but half don't. And it is not right that people who don't go to university are having to bear all the cost for others to do so. Well, that was the Chancellor. And while the argument about the structure of the system is right, that isn't an argument for why you change what has effectively been a contract that people signed up to. I also think it's important that as we lower the repayment threshold relative to minimum wage, when this originally came out, I explained this as effectively a no-win-no-fee form of education, because those people who earned a lot after university would have to pay a lot, and that was how I always phrased it, and that is certainly coming to fruition now.

9:44Those people who didn't earn much, which was the main worry and the questions I got at the time, it's interesting, it's slightly morphed now, the questions I got for, I don't want my kids going to university with£40 ,000 of debt and then they come out and they've got a very low-paying job, how will they repay it? And the answer then was, well, they probably won't have to repay it. But as we have lowered the repayment threshold, the point at which you start repaying that 9 % above the threshold, so that it effectively is not that much more than someone working full time on minimum wage. I think we have one of the problems is what is going on is we have diminished the no win, no fee, because effectively, if you're only getting minimum wage, that's not a graduate premium.

10:18And you're still going to have to repay some of the loan. I think some of the language the Chancellor used is starting to become outdated with the way that the loan now works. Anyway, I'll let others debate the Chancellor. I wanted to talk about a few more different things. I want to try and move us from the politics into the practical. But before I do that, a couple of notes. Some people who heard me in that Newsnight interview got in touch and they said, I'm confused. You've always said this works like a tax. Now you're arguing that they shouldn't change the repayment threshold because it's a contract.

10:54It's a loan. and you are quite correct. There is a duality in what I'm talking about and I've had to deal with that duality for 15 years so it isn't new for me. This isn't an inconsistency. For a graduate who takes a student loan, well the student who takes a loan and becomes a graduate, in practice for the majority this will work like a tax. You will repay nine percent of what you earn above a threshold and the vast majority on Plan 2 student loans will do that for 30 years until it wipes. Only those who took smaller loans or who are on the very higher end of the graduate earning spectrum will clear this within the 30 years, in which case it starts to resemble more of a loan.

11:45That is how graduates should view it for financial decision making. But that is separate to the more political and legal side of what do you actually have. And this is where that split between my practical explanation and the political status comes from. The first thing is it can't be a tax because not everybody pays it. Those people who come from families wealthy enough that they didn't have to take a student loan because they would have paid it for them, they don't have this. So it isn't a tax because it doesn't apply to all graduates. It just in practical finance works more like a tax. It's also not a tax because it's done by contract.

12:25And the reason that governments do it by contract is so that if you would leave the UK, while you wouldn't have to pay UK taxes if they left the UK, you would still have to repay your student loan under the contract that you signed up to. And that was a choice of government to do it via a contractual form. So, and it's also not a tax because it's hypothecated to an individual your student, but that's getting a bit arcane. So the reason the split works is because one is about how you must consider this practically in making your decisions of whether you should overpay or how it works or how much you're going to pay.

12:57The other is technically what your deal was with the government. And your deal with the government is you signed up to a contract. Now, it seems fundamentally unfair that you, as an individual who signed up to get a Plan 2 student loan, couldn't suddenly say, actually, I want to pay less, so I'm going to start paying you less. I mean, you wouldn't be allowed to do so. But the government has said, we want you to pay more each year by freezing the repayment threshold, even though when you signed up, especially if you signed up in 2012, you were told in all the government documentation that you were signing up to a loan that would go up with average earnings.

13:29Well, it hasn't gone up with average earnings already, and a repayment threes will make that even worse. So that's why there is a sort of, some people got a confusion between when do I call it a loan, when do I call it a tax. Well, legally, it was a loan contract. In a practical sense, you need to think of it more as a graduate tax in most cases. Let me move on to the main practical point that people are saying at the moment. And I 100 % understand the anger, frustration and psychological damage that the above inflation interest rates on plan two loans have caused. What's happening for some people at the moment, even some people on decent earnings paying off relatively substantial amounts, is they check their student loan statement and they see that it's still going up even though they're paying it off.

14:18And they're finding that incredibly frustrating and difficult. Now, I need to say that since 2012 student loans were launched, and in fact before, I have always had a principled objection to above inflation interest on student loans. I think it's psychologically damaging and more so the line I was using way back when, when it first started, is it is wrong that we are charging students for the financing of their loans as well as for the loans themselves. And that's what above inflation interest does. Inflation interest, while people still don't like it, ultimately means if you borrow£40 ,000, you pay back£40 ,000 in whatever the currency is worth in future times.

15:03It's still it's just gone up. The number's gone up, but it's still your earnings have gone up and inflation's gone up. I mean, the fact they use the RPI, not CPI inflation is a problem in that. But the big problem with Plan 2 student loans is the rate of inflation that has been set. And that's why it works this way. but part of the way that it is presented is absolutely psychologically damaging, because we need to go back to that original thing that I said, that we've known since the very beginning, and I've been reading my blogs back in 2012 when this launched, saying the vast majority of students who take this will not repay in full in the 30 years.

15:39So for the vast majority of students, you simply have to perceive this as a 9 % tax above the threshold for 30 years. Now, the fact that the threshold isn't going up and hasn't gone up as much means you're paying more tax than you should be and more tax than it works like, but it doesn't change the way that it works. And therefore, when you're looking at the interest on your statement, what you actually have to understand is the interest, people refer to it as I'm being charged this amount of interest. Well, actually, within student loans, perversely, because of the way the system operates, the amount of interest added to your statement is not automatically the same as the amount of interest that you have to repay.

16:22And this is for a very simple reason. Most graduates will not pay it off within the 30 years. Therefore, the sole thing that dictates what they pay is how much they earn. You pay 9 % above the threshold. If you were to, let's reduce this to absurdity. I'm not saying this happens, but this is to try and explain the concept. if you were to never earn over the threshold, then you would never pay back what you originally borrowed and you would certainly not pay back any interest. If you were to only earn slightly over the threshold over 30 years, then you might pay back some of what you borrowed, but you would not pay back all of it and you would not pay any interest.

16:58At a bit of a higher earnings level, you'd pay back all of what you borrowed and not any interest. At a level above that, you'd pay back all of what you borrowed and some interest, but not all the interest added. The only people who will repay all the interest added to their loans are the people who will clear it in full within the 30 years. Everybody else will pay less than the interest that is added. Now, please, no one see this as me saying it's cheap. A 9 % additional tax above what is going to be a frozen threshold of£29 ,000 from 2027 is very expensive and more expensive than it was when you got it out originally and what the people were promised it would be.

17:41but it works like a tax. So for those who aren't high earners or didn't borrow a smaller amount, in reality, you just need to look at it as a tax. And the fact that your interest is not shrinking is irrelevant because the interest does not dictate what you pay. The likelihood is you're just going to pay 9 % of everything you earn over 30 years. Now, this isn't a SOP. This isn't me saying that's good or anything like that. This is me just saying there's no point in panicking over it because actually it's not going to affect what you pay in many cases. And you have to get that in your head. And the reason I'm so militant on getting that and explaining that to people, and I've been explaining it this way for a very long time, is because if you start to panic over the interest being added to your statement when you're not going to pay it, the next logical thing that comes into your head is you think, I should probably be overpaying this.

18:32Now the rules on overpayment on student loans, you can do it whenever you want. You can voluntarily overpay more of your student loan whenever you want. But if you overpay voluntarily, as opposed to accidentally, and we've talked before about reclaiming overpaid student loans, there's millions of cases of people who have accidentally overpaid and they can get the money back. But if you overpay voluntarily, the rule is once you've overpaid, you cannot get your money back. So I have met people who have been panicked into overpaying their student loan, and they're just paying off£1 ,000 or£2 ,000 when they've come into a little bit of money.

19:03But the fact that they have paid off£1 ,000 or£2 ,000 will not be enough to change the fact that they won't clear the loan within the 30 years before it wipes. And that means they will not pay a penny less in future because they overpaid by£1 ,000 or£2 ,000. That money has been thrown away. And that's my concern about the focus on the interest for some people who won't pay it, that it might scare you into overpaying. So I'm just going to talk you through now the circumstances where overpaying may help you and the circumstances where it is less likely to help you. For the majority of Plan 2 holders, it's likely smaller overpayments of, say, a few thousand pounds will still leave you repaying 9 % of your earnings for the full 30 years, in which case the overpayments won't have any impact and you will have just flushed that money away.

19:53Being very clear, I'm deliberately repeating. Now, as well as your income, obviously the higher income you have, the more light to clear within the 30 years and the more likely therefore overpaying becomes realistically beneficial for you, there are other things that affect that too. Overpayments are more likely to help as you're more likely to clear within 30 years if you borrowed materially less than the full tuition and living loan, if you're on a career path where incomes accelerate rapidly, if you're likely to work the full 30 years with few breaks or time off or out of work including long parental leaves.

20:30And if you have a substantial amount, you can overpay. I mean, for most typical English students with bigger loans, I'm talking tens of thousands of pounds, which would actually mean you would get to the point where you can clear it. If you have smaller amounts, they are less likely to help you. And of course, the opposite is true. Long career breaks, you borrowed the full amount, then you're less likely to get from overpaying. How to work it out is a nightmare. There is no way to do it accurately. I have put information online that you'll be able to find where I have created an AI prompt calculator, which gives you all the questions you need to ask and you can put it into AI.

21:04Of course, AI is not foolproof, but it gives you an idea of whether you're likely to clear or not. If you're close to it looking like overpaying works for smaller amounts, I would still err on the side of caution because you can't change your mind. And I would probably suggest in that case, if you're not sure, simply take that money, put it into the highest interest savings account that you possibly can, paying hopefully over 4%. That will mitigate some of the current 6.2 % interest that you may be in charge because the interest on Plan 2 student loans, the exact amount depends on what you earn.

21:36It starts at just RPI inflation. It goes up to RPI plus 3%, which this tax year is 3.2%. And again, those thresholds, the amount where you start paying the highest interest, that has not gone up as it should have done. They haven't increased those and indexed those as they should have done, which is another problem in the way that the loans have actually materialised compared to what we were originally told it would work. But anyway, I digress, as I often do. So you'd have that money in a savings account so that you could pay off the loan any time if it looked more likely that overpayment would help you and it would mitigate the fact that you're paying some interest.

22:09You'd still be, you know, 2.2 % down on it, but it wouldn't be that bad. Now let's move into the situation where overpaying is a clear winner. You've done the maths, you're a high earner or you're borrowed a lower amount, you're going to clear within 30 years. This is your paying interest at 6.2 % because you're a higher earner in that bracket. Then you're going, I want to pay this off because I don't want to see the interest accruing. And if you're right, then this could save you a significant amount overpaying. There are some buts though. Do think about where you are in your financial life path.

22:42Are you going to need a mortgage deposit or to pay off a mortgage or other borrowing in future? If so, then unless you have such very substantial funds that that's all going to be fine too, overpaying the student loan now may just mean you need to borrow back in future via a different form of lending. And while the interest rate on the student loan may be higher currently than some mortgages, it isn't higher than most personal loans. And it does have the crucial advantage that if something unexpected happened that your income dropped or you lost work or were unable to work, your repayments would drop or stop altogether on the student loan, which would not happen on a commercial loan, nor will they be wiped at some point.

23:25So again, if it all seems good for you, then go for it. Save yourself some money. If you're not sure, then putting money into a savings account while you wait and see what happens may be a safer route. So there we go. I hope I have managed to move from the political to the practical. and while these loans people are feeling they are very expensive at the moment, absolutely, for all the reasons I discussed on Newsnight, the fiscal drag and the cost of living and graduate premium, ultimately, when you're going to make a decision about the loans, it needs to be done in a clinical, financial way as to what is right for you in the future.

24:02And if you do it on an emotional way because of fear over the interest, you could get it wrong. That doesn't mean you shouldn't be fearful. I think the whole way it's presented is psychologically damaging. The way it's designed is psychologically damaging. Again, I've been saying it for 15 years until I'm blue in the face. But that is the way that the system works. And if you're unhappy about the repayment freeze, as I said in Newsnight, this is something that will work for people to write to their MPs about. Some people have asked me to provide template letters to write to the MPs. Well, I'll be honest with you.

24:33The problem with that is if MPs receive a lot of obviously similar letters, they tend to discount it as some form of campaign that's gone on. An individualised letter is a much more effective tool that people see in their mailbags and go, uh-oh, there's something going on here. And I would suggest you write it that way. I hope this has been helpful. I hope I'm allowed to say I have a very detailed step-by-step blog that I've just published on my website for help for people with Plan 2 loans as you can see what's going on. If you're unsure, that may be helpful on top of the podcast and you can have a read of it.

25:05and I think that's probably where I should stop. I could go on and talk about this subject for hours more but this is meant to be a special mini podcast. Thank you very much for listening.

25:31Martin Lewis is the founder of moneysavingexpert.com But of course, other consumer and price comparison websites are available. You can get in touch with Martin's podcast production team by emailing martinlewispodcast at bbc.co.uk. The offers and rates mentioned in the podcast are correct at the time of recording. However, if you are listening on demand, it's worth double checking as details can date. Remember to subscribe on BBC Sounds and leave us a review however you listen.