Plan 2 Student Loan Write Off Calculator: How Much Will You Save?

Understanding the Plan 2 Student Loan Write Off
The Plan 2 student loan repayment system is an essential element of the UK higher education financing structure. Introduced in 2012, it primarily affects students in England and Wales who started their undergraduate courses after this date. Unlike traditional loans, the repayment system for Plan 2 loans is income-contingent, meaning repayments are only made when the borrower earns above a certain threshold. Understanding how this system works, including the loan write-off policy, is crucial for borrowers.

Income-Contingent Repayment
The repayment terms under Plan 2 are based on a percentage of the borrower’s earnings above a specific threshold. As of 2024, the repayment threshold is £27,295 per annum. Borrowers are required to pay 9% of their income above this threshold. For example, if a borrower earns £30,000 a year, they would pay 9% of £2,705 (£30,000 - £27,295), which equals approximately £243.45 per year or about £20.29 per month.

Interest Rates and Their Impact
Interest on Plan 2 loans is calculated based on the Retail Price Index (RPI) plus an additional percentage that varies depending on the borrower’s income. This means that the total amount owed can increase over time, especially for those who do not earn enough to make significant repayments.

For example, a graduate earning below the threshold will see their loan grow due to interest rates being applied, even if they are not currently making any repayments. Those earning more will see their balance decrease at a slower rate due to the interest charges.

Loan Write Off Policy
One of the key features of Plan 2 loans is that any outstanding balance is written off after a certain period, typically 30 years from the April after the borrower graduates or leaves their course. This policy means that many borrowers may never fully repay their student loans. The write-off period is a crucial factor to consider when calculating the overall financial impact of a student loan.

Calculating the Write Off
To estimate how much of your student loan may be written off, a simple calculator can be incredibly useful. Here's how you can calculate it:

1. Determine Your Annual Income: Identify your annual income and compare it to the repayment threshold. This will help you estimate how much you’ll repay each year.
2. Estimate Your Future Income Growth: Consider potential salary increases over the 30-year period. Higher earnings mean higher repayments, reducing the amount that may be written off.
3. Account for Interest Rates: Factor in the varying interest rates over the years. Higher rates mean your loan balance will grow more quickly, potentially increasing the amount written off.
4. Project Total Repayments: Multiply your annual repayments by the number of years you expect to be repaying. Subtract this total from your initial loan balance plus accrued interest to estimate the write-off amount.

Example Calculation
Let’s take a hypothetical graduate, Jane, who has a starting salary of £28,000, which is expected to increase by 2% annually. She took out a student loan of £50,000. Over 30 years, assuming the RPI is 3%, her repayments and the accruing interest would look something like this:

Year	Salary	Repayment	Interest Accrued	Balance Reduction	Remaining Balance
1	£28,000	£63.45	£1,500	£63.45	£51,436.55
5	£30,850	£320.85	£1,650	£320.85	£55,709.15
10	£34,103	£609.72	£1,800	£609.72	£59,345.43
20	£41,567	£1,283.46	£2,100	£1,283.46	£65,782.57
30	£50,000	£2,048.55	£2,500	£2,048.55	£70,234.55

In this example, despite making regular repayments, Jane's balance continues to grow due to the interest exceeding her repayments, leading to a significant portion of her loan being written off at the 30-year mark.

Considerations for Future Borrowers
For students considering taking out a Plan 2 loan, understanding the likelihood of a write-off is essential. The interplay between income, interest rates, and repayment amounts makes it likely that many will not repay their full loan amount before the write-off period ends.

Advantages and Disadvantages of the Plan 2 Loan System
The Plan 2 loan system offers both advantages and disadvantages. On the plus side, the income-contingent nature of repayments ensures that only those who can afford to repay do so, preventing undue financial strain. Moreover, the write-off policy acts as a safety net for those who may struggle with repayments over the long term.

However, the system also has its drawbacks. The rising interest rates can significantly inflate the total amount owed, leading to a growing loan balance over time. For those who earn just above the repayment threshold, this can feel like a financial burden that doesn’t diminish despite regular repayments.

Conclusion
The Plan 2 student loan system is designed with flexibility and borrower protection in mind, particularly through its income-contingent repayments and loan write-off policy. However, the high-interest rates and extended repayment periods mean that many borrowers may see their loan balances grow, rather than shrink, over time. Using a calculator to estimate potential savings from a loan write-off can provide valuable insights into the long-term financial impact of borrowing under this system. For many, understanding these dynamics can help in making informed decisions about their educational financing.