What Is a Plan 1 or a Plan 2 Student Loan?

Whether you’re a current student in the UK or you’ve already graduated, chances are you’ve taken out a student loan. Higher education, like a university degree, isn’t cheap — far from it! And like with any big investment, it can come with a lot of questions.

The changes to the student loan system over the years have made things a bit confusing, but understanding the ins and outs of your plan is the first step in taking control of your student finances. Don’t worry… we’re here to help you get to the bottom of it!

So, what are Plan 1 and Plan 2 student loans? And which one applies to you?

Table of Contents

1. Key Differences Between Student Loans
2. Understanding Plan 1 Student Loans
3. Understanding Plan 2 Student Loans
4. Which Student Loan Plan Are You On?
5. What If I’m On A Plan 4 or Plan 5 Student Loan?
6. How Student Loan Repayments Work and How to Manage Them
7. Conclusion
8. FAQs

Key Differences Between Student Loans

Before we dive into the details of Plan 1 and Plan 2, let’s cover a few basic rules and points of difference when it comes to all types of student loan in the UK.

1. Repayment Based on Income 💰: How much you repay each month is based on your pre-tax income. Once you hit the individual “threshold” for your loan type (Plan 1 or Plan 2), you’ll pay a percentage of your income above that threshold figure back to the government. For all undergrad loan types in the UK, this is 9%.
2. Interest 📈: Regardless of your loan plan, you’ll have to pay interest. In simple terms, interest is money you have to pay as a fee for borrowing. How much you pay depends on your loan plan, which we’ll get into later.
3. Loan Forgiveness ✨: Eventually, under every plan, any remaining debt gets completely written off. Regardless of how much you’ve repaid (even if it’s £0), you won’t need to give Student Finance another penny… phew!

Now that we’ve outlined the three key differentiators, let’s explore what Plan 1 and Plan 2 student loans are and which one you fall under. If you need a quick answer without any of the details, scroll down to see a summary table near the end of the article.

Understanding Plan 1 Student Loans

First up is the O.G. loan type: Plan 1. You have a Plan 1 loan if:

• You’re from England or Wales and started uni between 1998 and 2011, or
• You’re from Northern Ireland and started uni sometime since 1998.

Under this plan, you’ll need to repay your loan if you earn over £24,990 per year. Remember, this is pre-tax, and this threshold has risen every April since 2012, so keep an eye on it. Once you hit this salary, you’ll repay 9% of your income over the threshold.

Interest is calculated every September. It’s either the rate of inflation (measured by the Retail Price Index, or RPI) or the Bank of England base rate plus 1% — whichever is lower.

For example, in March 2023, the RPI was 13.5%. That’s more than the Bank of England base rate (5.25%) plus 1%. This means the current interest rate for Plan 1 student loans is 6.25%. Not a bad system when the economy gets rough, hey!

As for the Plan 1 write-off date, it depends. If you received your first loan before 1 September 2006, it’ll be written off when you turn 65. If you received your first loan after this date, it’ll be written off after 25 years.

Understanding Plan 2 Student Loans

Next up: Plan 2. You have a Plan 2 loan if:

• You’re from England and started uni between 2012 and 2022, or
• You’re from Wales and started uni sometime since 2012.

Under Plan 2, the repayment threshold is £27,295 per year. Like Plan 1, you’ll repay 9% of the income above this amount.

The interest you pay is based on the rate of inflation, measured by the RPI. Usually, it’s the RPI plus 3%, but when the cost of living is particularly high, a temporary “Prevailing Market Rate” cap is put in place.

For example, with the RPI in March 2024 at 12.5%, the interest rate is currently capped at 7.8%.

Plan 2 loans are written off 30 years after the first April you were due to repay. That means that if you finished uni at age 22, it’ll get written off when you’re about 52.

Which Student Loan Plan Are You On?

Still a bit stumped? Here’s a simple table to help you work out which Plan you fall into:

What If I’m On a Plan 4 or Plan 5 Student Loan?

Some of you won’t be on Plan 1 or Plan 2, but a totally different loan type altogether!

For example, if you’re from Scotland and started uni sometime since 1998, then you’ll be on Plan 4. This was introduced by the Scottish government in April 2021 and replaced Plan 1 for anyone who started uni in or after September 1998.

To properly get to grips with it you should head over to our dedicated article, but the £31,395 per year repayment threshold means that it’s a pretty good deal!

The final undergraduate loan type is Plan 5. This will apply to you if you started uni from 2023 and you’re from England. There have been quite a few complaints about Plan 5, but we really deep dive into the details of this plan in another one of our articles.

In short, you only have to earn £25,000 before you need to start making repayments and the debt is written off after 40 years. Not the best! But like with other plans, your repayments are income-contingent, and so they should always be within your means.

How Student Loan Repayments Work and How to Manage Them

Now that we’ve covered Plan 1 and Plan 2 student loans and what they mean for you, let’s get into a few practical tips to help you manage those repayments:

1. Repayments Begin After Uni 💼: Repayments only start once you’ve finished uni. You only need to make them once your salary reaches the threshold for your loan type, and the amount you repay will change if your income increases or decreases. If you ever fall below the threshold again in your working life, the repayments will be put on pause.
2. It’s Automatic 🧑‍💼: Your loan repayment will be taken automatically out of your paycheck, just like income tax, National Insurance (NI), and any pension contributions. Your employer organises this through the PAYE (pay-as-you-earn) system before you get your income, so you never need to make the payments yourself. This is only different if you’re self-employed, in which case you’ll need to do all of this through the self-assessment scheme alongside your income tax and NI.
3. Budget, Budget, Budget 📒: You might not need to put much thought into your repayments if your employer’s sorting it out through PAYE, but that doesn’t mean that you shouldn’t be factoring it into your monthly budgets. This is especially true if your salary is on the rise, and you need to take changing outward expenses like income tax and loan repayments into account. For tips and tricks on how to manage your money after payday, you can check out our comprehensive guide to budgeting here.

Conclusion

The student loan system in the UK is a bit of a minefield, but hopefully, this introduction to Plan 1 and Plan 2 has helped you to suss things out. Getting a uni degree is a huge investment into your future and a student loan is a necessary evil for many — it’s a normal part of adulting in 2024 and you’ll learn to take it in your stride.

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FAQs

What are student loan repayment plans?

Student loan repayment plans were created to help graduates manage their student debt by structuring how and when they repay their loans. These plans are designed based on income and loan type, ensuring repayments are manageable based on individual financial circumstances.

How do I know if I have a Plan 1 or Plan 2 student loan?

Whether you have a Plan 1 or Plan 2 student loan depends on where you’re from and when you started university.

You’ll have a Plan 1 student loan if you’re from England or Wales and started uni between 1998 and 2011, or if you’re from Northern Ireland and started uni sometime since 1998. The Plan 2 student loan type is applicable to you if you’re from England and started uni between 2012 and 2022, or if you’re from Wales and started uni sometime since 2012. Check out our table above for a more visual breakdown!

If you’re still unsure which repayment plan you’re on, you can get in touch with the Student Finance Company and they’ll be able to help you out.

What are the four types of student loans in the UK?

There are four different loan types for undergraduates in the UK: Plan 1, Plan 2, Plan 4, and Plan 5. Which loan you’re on will depend on where you’re from and when you started university.

Can I switch from a Plan 1 to a Plan 2 loan?

No, you can’t decide which repayment plan you’re on. Which loan type you have depends on where you’re from and when you first became a student.

What happens if I move abroad with a student loan?

If you move abroad with a student loan, you’ll still need to make your repayments! Working in the UK makes things pretty straightforward; your payments are automatically deducted from your payroll. If you move abroad for more than three months, you’ll have to do a bit more of the legwork and send HMRC the right paperwork so they can work out how much to charge you.

The final amount you’re expected to pay back every month will vary depending on which plan you’re on and the cost of living in the country you’re living in. Interest accrues in the same way and you’ll be charged a “Fixed monthly repayment” if you don’t report your earnings. Trust us, this is bad news!

How does interest accrue on my student loan?

No matter which loan plan you’re on, you will always have to pay interest. Interest is essentially a fee for borrowing money, and the amount you’ll pay will depend on your loan plan.

For Plan 1, it’s either the rate of inflation (measured by the Retail Price Index, or RPI) or the Bank of England base rate plus 1% — whichever is lower. If you’re on a Plan 2 loan, the interest you pay will be based on the rate of inflation, measured by the RPI. Usually, it’s the RPI plus 3%, but when the cost of living is particularly high, a cap called “Prevailing Market Rate” is put in place.

Are there any benefits to repaying my student loan off early?

This is quite a common question from people who maybe have some spare cash to repay their student loan debt early or make bigger repayments. It’s quite complex, but the answer is pretty much always no. If you work out the sums, it’s always better to focus on other financial goals first, like saving for a house or investing, rather than paying off your student loan early. The interest rates on student loans are often lower than other forms of debt, making them less of a priority to pay off quickly.

How do you change your student loan repayment plan?

There is no way of changing your student loan repayment plan. It’s an automatic process based on your income and the loan type you have. Your repayments will adjust automatically as your income changes.

What is the best repayment plan for student loans?

There is no single "best" repayment plan as it’s going to depend on individual circumstances. You also have no way of deciding which plan you’re on, so I’m afraid it’s not worth putting too much thought into it.