Plan 2 vs Plan 5 Student Loan — What Changed and Who Pays More?

What Changed — and Why

Plan 5 was introduced following the Augar Review of post-18 education funding, which recommended significant changes to the student loan system in England. The review concluded that Plan 2 had become unsustainable for the government — with around 75-80% of borrowers expected to have their loans written off, the cost to the taxpayer was enormous. Plan 5 was designed to shift more of the cost from taxpayers to graduates, primarily through the extended write-off period.

The key reforms were: reducing the repayment threshold from £29,385 (Plan 2) to £25,000 (Plan 5), which means graduates start repaying sooner and pay more at any given salary; reducing the interest rate from a variable 3.2%-6.2% (Plan 2) to a flat RPI rate of 3.2% (Plan 5), which looks generous but primarily benefits higher earners who repay in full; extending the write-off period from 30 years to 40 years, which is the most significant change and means graduates could be making repayments into their early sixties; and increasing the tuition fee cap from £9,250 to £9,790 (a modest increase that was frozen for years under Plan 2 and only recently increased).

Understanding these changes together — rather than in isolation — is essential. The lower interest rate grabs headlines, but it is the 40-year write-off that fundamentally reshapes the economics. A graduate who would have been free of student loan repayments at age 52 under Plan 2 now faces deductions until age 62 under Plan 5. For many, this extra decade of repayments far outweighs the benefit of lower interest.

Side-by-Side Comparison

Threshold Comparison — £29,385 vs £25,000

The lower Plan 5 threshold of £25,000 compared to Plan 2's £29,385 means that Plan 5 borrowers start repaying at a lower salary and pay more at every salary level. The difference is £4,385 per year, which translates to exactly £32.89 more per month in repayments at any given salary above both thresholds.

At a salary of £30,000, a Plan 2 borrower repays 9% of (£30,000 minus £29,385) which equals £4.61 per month. A Plan 5 borrower repays 9% of (£30,000 minus £25,000) which equals £37.50 per month. The Plan 5 borrower pays £32.89 more per month — more than eight times the Plan 2 amount at this salary level. At £35,000, Plan 2 repays £42.11 per month while Plan 5 repays £75.00 — still £32.89 more, but proportionally less dramatic.

This lower threshold is particularly impactful for graduates in their early career years when salaries are typically in the £25,000-£35,000 range. Where a Plan 2 borrower earning £27,000 would make no repayments at all, a Plan 5 borrower at the same salary pays £15 per month. These early-career repayments, while individually modest, accumulate over the extended 40-year repayment window to form a significant portion of total lifetime repayments.

The government's decision to set the Plan 5 threshold at £25,000 — significantly below the Plan 2 threshold — was deliberate. Combined with the expectation that the threshold will remain frozen or increase only slowly, the effect of fiscal drag (where salary inflation pushes more income above the threshold over time) means that Plan 5 repayments will grow in real terms even if the threshold is nominally increased by small amounts annually. For more on how thresholds affect repayments, see our guide on how student loan repayments work.

Interest Rate Comparison — 3.2%–6.2% vs 3.2%

On the surface, Plan 5's flat 3.2% interest rate looks much more generous than Plan 2's variable 3.2%-6.2%. For borrowers earning above £52,885, the difference is dramatic: 3.2% versus 6.2%. On a £50,000 balance, that is £1,600 versus £3,100 in annual interest — a saving of over £1,500 per year.

However, the interest rate primarily matters only for borrowers who will repay in full. For those whose balance will be written off (the majority under both plans), the interest rate is largely irrelevant — it changes the number that gets written off, but not the total amount the borrower pays. What matters for these borrowers is the threshold and the write-off period, both of which work against Plan 5 borrowers.

For the minority of high earners who will repay in full, Plan 5 is genuinely better on interest. A graduate who goes on to earn £70,000-£100,000 will pay substantially less total interest under Plan 5 than they would have under Plan 2. But this cohort — high earners who repay in full — is precisely the group that the government wanted to protect less, not more. The lower interest rate was a political concession that primarily benefits wealthy graduates, while the lower threshold and longer write-off primarily affect middle-income graduates. See our guide on student loan interest rates explained for more detail.

Write-Off Period — 30 Years vs 40 Years

The extension from 30 years to 40 years is the single most impactful change from Plan 2 to Plan 5. It means that a graduate who starts university at 18, graduates at 21, and begins repaying at 22 will make student loan repayments until age 62 under Plan 5, compared to age 52 under Plan 2. This extra decade of repayments is the primary mechanism through which the government recoups more of the loan cost from graduates.

To illustrate the impact, consider a graduate earning a steady £35,000 salary (adjusted for inflation). Under Plan 2, they would repay £42.11 per month for 30 years, totalling approximately £15,160. Under Plan 5, they would repay £75.00 per month for 40 years, totalling approximately £36,000. The Plan 5 borrower pays more than double — despite the lower interest rate. The extra 10 years of repayments at the higher monthly amount (due to the lower threshold) dramatically increase total lifetime cost.

This example uses a flat salary for simplicity, but the principle holds with salary growth. In fact, salary growth makes the disparity worse for Plan 5 borrowers because the extra decade of repayments occurs at the peak of their earning career (ages 52-62), when salaries are typically highest. A graduate whose salary grows from £30,000 at age 22 to £55,000 at age 50 would face substantial repayments in their fifties — repayments that a Plan 2 borrower would not make because their loan would already have been written off.

Worked Example — Median Graduate

Let us compare a typical graduate on each plan with realistic assumptions. Both start with a £45,000 balance, earn £28,000 at age 22, and see their salary grow by 3% per year (a mix of inflation and real wage growth).

In this scenario, the Plan 2 borrower makes total repayments of approximately £48,000 over 30 years before write-off. The Plan 5 borrower makes total repayments of approximately £98,000 over 40 years before write-off. Despite the lower interest rate, the Plan 5 borrower pays nearly £50,000 more in total lifetime repayments. The extra decade of repayments — at peak earning years — is the dominant factor.

This is the core insight about Plan 5: the lower interest rate benefits the minority who repay in full (high earners), while the lower threshold and longer write-off cost the majority (middle-income earners) significantly more over their lifetime. The reform shifted cost from higher earners and the government onto middle-income graduates.

Fiscal Drag and Threshold Erosion

Fiscal drag occurs when inflation pushes nominal salaries higher while the repayment threshold remains fixed or increases more slowly than inflation. This gradually pulls more income above the threshold, increasing real repayments over time even if the borrower's purchasing power has not changed.

Plan 5's threshold of £25,000 is already lower than Plan 2's £29,385. If the government freezes the Plan 5 threshold (as it did with Plan 2 for several years, and as the Augar Review recommended), the effect of fiscal drag is amplified. With 2-3% annual wage inflation, a graduate earning exactly £25,000 today (making no repayments) would earn approximately £33,600 in 12 years — paying £64.80 per month even though their real purchasing power has barely changed.

Over a 40-year repayment window, the cumulative effect of fiscal drag is enormous. If the threshold remains at £25,000 for the full 40 years while average salaries double (entirely plausible over four decades), a graduate on a median salary would be repaying 9% of a much larger portion of their income by the end of the period. This is a deliberate design feature of Plan 5 — the frozen or slowly-rising threshold ensures that the loan system collects increasing revenue over time without requiring any explicit policy change.

Plan 2 borrowers also face fiscal drag, but with a higher starting threshold (£29,385) and a shorter window (30 years), its impact is less severe. The combination of Plan 5's lower threshold and longer window makes fiscal drag a much more significant factor in total lifetime repayments.

Who Benefits from Plan 5?

Plan 5 is genuinely better for a specific subset of graduates: those who will repay in full. If you are on track to earn £60,000 or more for most of your career, the lower interest rate (3.2% vs up to 6.2%) means you pay substantially less total interest over the life of the loan. For a high earner clearing a £45,000 balance, the interest saving under Plan 5 could be £10,000-£20,000 compared to Plan 2.

Plan 5 is also better for graduates who spend extended periods below the threshold — for example, those who take career breaks, work part-time long-term, or emigrate and earn below the overseas threshold. These borrowers benefit from the lower interest rate (which slows balance growth during non-repayment periods) without being significantly affected by the longer write-off period (since they would not have been making repayments during those extra years anyway).

However, for the largest cohort — graduates earning between £25,000 and £55,000 for most of their career — Plan 5 is worse than Plan 2. They pay more each month (lower threshold), pay for longer (40 vs 30 years), and the lower interest rate does not benefit them because their balance would have been written off under either plan. This is the group that bears the additional cost under the reformed system.

Practical Implications for Plan 5 Borrowers

• Do not overpay unless you are certain to repay in full: With a 40-year write-off, many Plan 5 borrowers will have their balance written off. Overpaying a loan that would be written off is throwing money away. Use the Plan 5 calculator to model whether you will repay in full before considering overpayment. Read our guide on whether to repay early.
• Salary sacrifice is powerful: Because the Plan 5 threshold is low (£25,000), salary sacrifice into a pension is effective from relatively modest salaries. Salary sacrifice reduces your income for student loan purposes, cutting repayments while building pension wealth.
• Career breaks are less costly: The lower interest rate of 3.2% means your balance grows more slowly during periods of non-repayment (such as career breaks, parental leave, or further study). Under Plan 2, the balance would have grown at up to 6.2% during these periods.
• Plan for repayments into your sixties: Unlike Plan 2 borrowers who could expect freedom from student loan deductions in their early fifties, Plan 5 borrowers should budget for repayments into their early sixties. This has implications for retirement planning, pension drawdown timing, and overall financial planning.
• Consider the interaction with pension contributions: In your fifties and sixties, maximising pension contributions becomes urgent. Plan 5 borrowers making student loan repayments during these peak savings years face a conflict between building retirement wealth and making loan repayments. Salary sacrifice becomes even more important at this stage of career.

Summary — What Changed and What It Means

Plan 5 replaced Plan 2 with changes that primarily affect middle-income graduates. The lower interest rate (3.2% vs up to 6.2%) benefits high earners who repay in full, but the lower threshold (£25,000 vs £29,385) and the 40-year write-off period (vs 30 years) mean that most graduates will pay substantially more in total lifetime repayments. The reform shifted the cost of higher education from the government (who funded write-offs) onto middle-income graduates (who now pay for an extra decade).

For existing Plan 2 borrowers, nothing has changed — your terms remain as they were. For new Plan 5 borrowers, the most important action is to understand your likely repayment trajectory and plan accordingly. Use our Plan 5 calculator for personalised projections, and compare with Plan 2 to see how the changes affect your specific situation. The comparison tool makes it easy to see both plans side by side.

For further reading, explore our guides on how repayments work, when your loan is written off, interest rates explained, and salary-specific breakdowns at £30,000, £40,000, £50,000, and £60,000.