Student Finance

How Student Loans Really Work in the UK

UK 2026/27 · Updated May 2026 · 9 min read

Contents

  1. Why student loans aren't a normal loan
  2. Plan 1, Plan 2 and Plan 5 — which are you?
  3. How repayments work
  4. Interest rates explained
  5. When is the loan written off?
  6. Should you overpay?
  7. Student loans and mortgage applications
  8. Worked examples
  9. Frequently asked questions

Why Student Loans Aren't a Normal Loan

A UK student loan is fundamentally different from a bank loan or credit card. You can't miss a repayment, default on it, or have bailiffs knock on your door. It doesn't appear on your credit file. And — crucially — if you never earn enough to repay it in full, it is written off after a set number of years.

This is why financial experts often describe UK student loans as a graduate tax rather than a traditional debt. You pay 9% of your income above a threshold, collected automatically through payroll, for as long as you earn above that threshold. If your income falls below the threshold for a month, you pay nothing that month.

Understanding this distinction is essential for making good decisions about repayment — particularly whether to make voluntary overpayments.

Plan 1, Plan 2 and Plan 5 — Which Are You?

Your repayment plan depends on when and where you studied. Here's a quick guide:

PlanWho Is On ItRepayment Threshold 2026/27Write-Off Period
Plan 1Students from England/Wales who started before September 2012; Scottish and NI graduates£24,99025 years or age 65
Plan 2Students from England/Wales starting September 2012 – July 2023£27,29530 years
Plan 5Students from England starting August 2023 onwards£25,00040 years
PostgraduateMaster's and doctoral loans in England/Wales from 2016£21,00030 years

If you're unsure which plan you're on, check your Student Loans Company account. Many people graduate and assume they're on Plan 2 when they're actually on Plan 1 (which has a lower threshold but also shorter write-off).

How Repayments Work

You repay 9% of income above the threshold for Plan 1, 2 and 5. For postgraduate loans it's 6%. The repayments are deducted automatically through PAYE — your employer doesn't need to do anything special, and you don't have to manage it yourself.

Monthly Repayment Calculation (Plan 2)

Threshold: £27,295/year = £2,274/month.

If you earn £35,000/year (£2,917/month): monthly repayment = (£2,917 − £2,274) × 9% = £643 × 9% = £57.87/month

Annual repayment: £694. Your loan balance continues to accrue interest on the portion you haven't repaid.

If you have both an undergraduate and a postgraduate loan, you repay both simultaneously — 9% for the undergraduate plan plus 6% for the postgraduate loan, both calculated on the same threshold basis.

Calculate Your Student Loan Repayments

Enter your salary and loan plan to see your exact monthly deductions and repayment timeline.

Use the Student Loan Calculator →

Interest Rates Explained

Student loan interest in the UK is linked to inflation, not a fixed commercial rate. This makes it very different from a mortgage or personal loan — but it also means your debt can grow significantly in high-inflation years.

PlanInterest Rate (2025–26)How It Works
Plan 1Lower of RPI or Bank Rate + 1%Currently 4.3%. Capped to prevent runaway growth.
Plan 2 (below threshold)RPI onlyCurrently ~3.1%. Applies while earning below £27,295.
Plan 2 (above £49,130)RPI + 3%Currently ~6.1%. Tapers between threshold and £49,130.
Plan 5RPI onlyNo income-linked premium — same rate regardless of earnings.
PostgraduateRPI + 3%Applied from day one of the loan.

Rates are updated every September. The RPI figure used is from the March preceding the new academic year. In practice, this means your interest rate can change significantly year to year.

Key insight: For many Plan 2 graduates, the interest accruing on their loan is greater than their annual repayments — especially in early career years. This means their balance grows despite making repayments. This is entirely normal and does not affect how much you actually pay: your repayments are always fixed at 9% of income above the threshold, regardless of balance size.

When Is the Loan Written Off?

The write-off date is one of the most misunderstood aspects of student loans. Many people assume their debt will hang over them forever — it won't.

If you die, the loan is written off. If you are permanently disabled and unable to work, you may be eligible for early cancellation. These write-offs are not taxable income — you don't get a tax bill when the debt disappears.

Should You Overpay Your Student Loan?

This is the question graduates agonise over most — and the answer depends on your projected lifetime earnings.

When overpaying probably doesn't make sense

If you're unlikely to repay your full loan balance before the write-off date (which applies to the majority of Plan 2 graduates), then every voluntary overpayment just reduces the amount that gets written off. You're effectively giving HMRC free money that would otherwise have disappeared.

Financial modelling suggests only around 25–30% of Plan 2 graduates will repay in full. For the remaining 70–75%, overpaying is a net loss.

When overpaying might make sense

Before overpaying: Check your projected balance at write-off using our calculator. If your projected remaining balance at write-off is significant, overpaying early-career is almost always suboptimal. Consider investing that money in an ISA or pension instead.

Student Loans and Mortgage Applications

Student loan repayments do affect your mortgage affordability, because they reduce your take-home pay — and lenders assess what you can afford based on your net income after all deductions.

If you earn £40,000 on Plan 2, your student loan takes £1,144/year (£95/month). That reduction in disposable income will reduce the amount a lender is willing to offer. However, student loans do not appear on your credit file, and they don't directly affect your credit score.

See our guide to mortgage affordability for a detailed look at how lenders calculate what you can borrow, and use the mortgage affordability calculator to model your specific situation.

Worked Examples

Example 1 — Olivia: Plan 2, £32,000 salary, £45,000 loan balance

Olivia graduated in 2022. She earns £32,000. Annual repayment: (£32,000 − £27,295) × 9% = £4,705 × 9% = £423/year.

Interest (RPI ~3.1%, plus taper): approximately 4% = £1,800/year added to her balance.

Net balance change: +£1,377 per year. Her balance is growing despite making repayments.

Verdict: Unless she earns significantly more over time, she'll reach write-off in 30 years with a substantial balance remaining. Overpaying now would likely be wasted money.

Example 2 — Daniel: Plan 2, £75,000 salary, £45,000 loan balance

Daniel is a software engineer earning £75,000. Annual repayment: (£75,000 − £27,295) × 9% = £47,705 × 9% = £4,293/year.

At this repayment rate, he'd clear a £45,000 balance (with interest) in approximately 13–15 years — well within the 30-year window.

Verdict: Daniel is a high earner who will repay in full. He should consider whether early repayment makes sense relative to other uses of money (ISA, mortgage overpayment).

Example 3 — Sophie: Plan 5, £28,000 salary, £60,000 loan balance

Sophie started university in 2023, graduating in 2026. Plan 5 threshold: £25,000. Annual repayment: (£28,000 − £25,000) × 9% = £3,000 × 9% = £270/year.

With a £60,000+ balance and only £270/year in repayments, her balance will grow for decades. Plan 5 has a 40-year write-off — she'll be in her mid-60s when it clears.

Verdict: Almost certainly never repays in full. Treat it entirely as a graduate tax and focus on other financial goals.

Check Your Take-Home After Student Loan

See your exact salary after income tax, National Insurance and student loan deductions.

Use the Salary Calculator →

Frequently Asked Questions

You start repaying once your income exceeds the threshold for your plan. Plan 2 threshold: £27,295. Plan 5: £25,000. Plan 1: £24,990. Repayments are automatic through PAYE — there's nothing to set up, and you never miss a payment.
It depends on your plan. Plan 1 uses the lower of RPI or Bank Rate +1%. Plan 2 charges RPI to RPI+3% depending on earnings. Plan 5 charges RPI only. Rates change every September and are published by the Student Loans Company.
Plan 1: 25 years after the April following graduation (or age 65 for pre-2006 loans). Plan 2: 30 years. Plan 5: 40 years. Postgraduate loans: 30 years. Write-off is not a taxable event — you receive no tax bill.
For most graduates (especially Plan 2 and Plan 5), overpaying is financially suboptimal. If you're unlikely to repay in full before write-off, you're gifting money to the government. Higher earners (£70k+) who are on track to repay in full may benefit from overpaying. Always model your specific situation before deciding.
Yes — indirectly. Loan repayments reduce your take-home pay, which lenders factor into affordability calculations. However, student loans don't appear on credit files and don't affect your credit score. A £40,000 salary on Plan 2 loses about £95/month to student loan repayments, which slightly reduces your maximum mortgage offer.
Plan 5 applies to students starting university in England from September 2023. It has a lower threshold (£25,000) and no income-linked interest premium (RPI only), but a 40-year write-off period — meaning most Plan 5 borrowers will repay more than Plan 2 borrowers over their lifetime.