Difference Between Student Loan Repayment Plans 1 and 2

When it comes to repaying student loans in the UK, there are several repayment plans available, each designed to accommodate different financial situations. Among these, Repayment Plan 1 and Repayment Plan 2 are two common options. Understanding the differences between these plans can help borrowers make informed decisions about managing their student loan debt. This article provides a detailed comparison of Repayment Plan 1 and Repayment Plan 2, highlighting their key features, eligibility criteria, and repayment terms.

1. Eligibility Criteria:

Repayment Plan 1 and Repayment Plan 2 differ primarily in terms of eligibility.

Repayment Plan 1 is generally applicable to borrowers who took out their student loans before September 2012. This plan is also available for students who started their undergraduate courses before this date and have been studying for at least one academic year.

Repayment Plan 2 is designed for borrowers who began their undergraduate studies on or after September 1, 2012. This plan applies to new students and those who started their courses under the new student loan system introduced in 2012.

2. Repayment Thresholds:

The income thresholds for starting repayments under each plan vary significantly.

Repayment Plan 1 has a lower income threshold compared to Plan 2. For Plan 1, borrowers begin repayments when their annual income exceeds £22,015 (as of the 2023/24 tax year). This threshold is lower because the Plan 1 system was set up when living costs and university fees were different.

Repayment Plan 2 has a higher income threshold. Borrowers only start repaying their loans when their annual income exceeds £27,295 (as of the 2023/24 tax year). This higher threshold reflects the increased cost of living and higher tuition fees under the newer system.

3. Repayment Rates:

Both plans use a percentage-based repayment system, but the rates differ slightly.

Under Repayment Plan 1, borrowers pay 9% of their income above the repayment threshold. This percentage is calculated on the income earned above £22,015. For example, if a borrower earns £30,000, they would repay 9% of £7,985 (the amount above the threshold).

Under Repayment Plan 2, borrowers also pay 9% of their income above the repayment threshold, but this threshold is higher at £27,295. Thus, if a borrower’s income is £35,000, they would repay 9% of £7,705 (the amount above the threshold).

4. Interest Rates:

Interest rates on student loans are another area of difference between the plans.

For Repayment Plan 1, the interest rate is typically set at the Retail Price Index (RPI) plus up to 3%. This rate is applied to the outstanding loan balance and can vary depending on the borrower’s income.

For Repayment Plan 2, the interest rate is set at the Retail Price Index (RPI) plus up to 5%. This reflects the higher costs associated with the newer loan system, including increased tuition fees and living expenses.

5. Loan Forgiveness:

Both repayment plans offer loan forgiveness after a set period, but the length of time before forgiveness differs.

Under Repayment Plan 1, loans are forgiven 25 years after the April you were first due to repay, or when you turn 65, whichever comes first.

Under Repayment Plan 2, loans are forgiven 40 years after the April you were first due to repay. This longer forgiveness period is due to the higher cost of loans taken out under this plan.

6. Impact of Income Variations:

Both plans are designed to adjust payments based on income variations. If a borrower’s income falls below the repayment threshold, they are not required to make repayments under either plan.

For borrowers who experience significant changes in income, Repayment Plan 1 and Repayment Plan 2 provide flexibility. However, those under Plan 2 may have a slightly more manageable repayment burden due to the higher income threshold.

7. Summary of Key Differences:

To summarize, the primary differences between Repayment Plan 1 and Plan 2 are:

• Eligibility: Plan 1 for loans taken out before September 2012, Plan 2 for loans taken out from September 2012 onwards.
• Income Thresholds: Plan 1 starts repayments at a lower income threshold compared to Plan 2.
• Repayment Rates: Both plans require 9% of income above the threshold, but the thresholds are different.
• Interest Rates: Plan 1 typically has a lower interest rate compared to Plan 2.
• Loan Forgiveness: Plan 1 offers forgiveness after 25 years or at age 65, whereas Plan 2 offers forgiveness after 40 years.

Understanding these differences is crucial for borrowers to choose the repayment plan that best suits their financial situation and long-term goals.

Conclusion

Choosing the right repayment plan is a significant decision for managing student loan debt. By considering the eligibility criteria, repayment thresholds, rates, and forgiveness terms, borrowers can make informed choices that align with their financial circumstances. Repayment Plan 1 and Repayment Plan 2 each offer distinct features designed to accommodate different needs and stages of a borrower’s life.