Education Fee Planning - Rethinking Student Loans For Families In England

Plan 5 applies to students in England starting undergraduate courses from 2023 onwards, including undergraduates who will start in 2026. It has been designed so that, in real terms, graduates do not repay more than they borrowed. It is worth stressing from the outset that Plan 5 loans are very different to earlier Plan 2 loans, and the information in this article relates to Plan 5 loans only. Note also that student finance is devolved across the UK and the information here applies only to Student Finance England. 

Here are the key features of Plan 5 student loans in England:

Interest is set at Retail Price Index - RPI - only. This means the interest is designed to keep pace with inflation rather than add a premium on top. In real terms, the loan balance does not grow beyond inflation.

However, interest begins accruing from the day the first payment is made to the university (tuition fees)/student (maintenance loan). There is no interest-free period during study. As a result, upon graduation, the balance will be higher than the amount borrowed, unless repayments have been made in the interim. 

That said, the balance itself does not determine monthly repayments.

It is important to distinguish between the two elements of student borrowing.

The tuition fee loan covers university fees and is not means-tested. Eligible students can borrow the full annual tuition fee amount regardless of parental income. This is paid directly to the university.

The maintenance loan, however, is designed to support living costs such as accommodation and food. This element is means-tested against household income. For higher-earning families, the available maintenance loan is reduced, often significantly, on the assumption that parents will contribute towards living expenses.

For families with an income of around £25,000, the amount over which the maximum maintenance loan starts to reduce; this distinction matters. Many will find that while their child can borrow the full tuition fee amount, they may receive only a limited maintenance loan. This frequently leads to parents funding living costs directly, even if tuition fees are financed through the loan system.

The maintenance loan thresholds for 2026/27 are yet to be announced, but projected rates can be found here.

Graduates repay 9% of income above £25,000 per year. Repayments are collected automatically through PAYE and function much like an additional tax band.

Below are illustrative monthly repayments and the effective percentage of gross income:

Even at £100,000 per year, repayments equate to just 6.8% of gross income.

The crucial point is this - the outstanding balance does not affect the monthly payment. Whether the graduate owes £30,000 or £90,000, the repayment is driven purely by income.

Plan 5 loans are written off 40 years after the April in which the graduate first becomes due to repay, typically the April following course completion.

Current forecasts suggest that only around half of Plan 5 borrowers are expected to repay in full before the write-off point. Many will repay for a period and then see the remaining balance cleared.

Graduates or parents can make additional repayments at any time. However, overpayments are irreversible unless made in error.

Importantly, overpaying does not reduce the required monthly deduction unless the loan is cleared in full. It simply reduces the outstanding balance.

From a technical perspective, it is a loan. From a practical financial planning perspective, it behaves more like a time-limited graduate tax.

Repayments:

• Are based solely on income
• Stop if income falls below £25,000
• Cease entirely after 40 years if not repaid 

This structure significantly reduces the financial risk compared with conventional commercial debt.

The psychological impact of seeing a large balance grow with inflation is real. However, focusing on the balance can be misleading if it has no bearing on actual cash flow.

For wealthy families who could fund university from capital, the real issue is opportunity cost.

If you have £60,000 to £80,000 available to pay fees and living costs, what else could that money achieve over time?

Under Plan 5, even on £100,000 of gross income, repayments equate to 6.8% of salary.

Now consider alternative uses of capital:

• Pension contributions may benefit from 20% to 45% income tax relief
• Salary sacrifice reduces income tax, National Insurance, and student loan repayments simultaneously
• A Lifetime ISA provides a 25% government bonus
• Funds retained could form part of a property deposit, reducing future mortgage borrowing 

In many scenarios, the effective uplift exceeds the percentage of income being repaid on the student loan.

From a pure wealth creation perspective, using capital to invest - rather than to eliminate an income-contingent liability - can often produce superior long-term outcomes.

A common concern is whether a large student loan balance will damage mortgage eligibility.

In practice, lenders focus on the monthly repayment, not the outstanding balance. The deduction is treated similarly to income tax or pension contributions when assessing affordability.

This means the impact is usually modest and directly linked to income. In many cases, gifting towards a deposit to buy a home has a more meaningful effect on mortgage options than clearing a student loan early.

There are circumstances where funding university directly may be appropriate:

• The family has surplus capital well beyond other planning needs
• The child is almost certain to be a consistently very high earner and likely to repay in full
• There is a strong desire to avoid any loan exposure for personal or cultural reasons
• Estate planning objectives favour lifetime gifting 

However, even for high earners, modelling is essential. Career breaks, periods overseas, childcare responsibilities, or changes in earnings can materially affect lifetime repayments.

Another overlooked benefit of Plan 5 is flexibility.

If a graduate stops working or reduces hours, repayments fall or cease automatically. There is no requirement to negotiate with a lender. That built-in protection has value, particularly in uncertain economic conditions.

If parents instead deploy capital to clear fees, that liquidity is gone. It cannot be reclaimed if circumstances change.

It is important to acknowledge that financial planning is not purely mathematical.

For some families, the emotional comfort of knowing their child has no student loan is worth more than any theoretical investment return. Peace of mind has value.

However, when viewed strictly through a financial lens, it is difficult to identify scenarios where using personal capital in place of Plan 5 borrowing produces a superior outcome - unless repayment in full is virtually guaranteed and surplus capital is abundant.

For families who are lucky enough to have a choice on whether or not to fund university, the conversation should not centre on the size of the loan balance. It should focus on:

• Payment as a percentage of gross income
• Opportunity cost of capital
• Tax efficiency
• Cash flow flexibility
• Long-term wealth management objectives 

University funding is no longer simply about avoiding debt. It is about allocating capital in the most effective way for the family’s broader financial planning strategy.

Before making a decision, it is wise to model projected earnings, investment returns, and tax positioning carefully. A structured analysis can transform what feels like an emotional dilemma into a clear strategic choice.

Your financial adviser can help you make an informed decision about whether you should fund your child’s education from your savings or make use of the Plan 5 student loans system. If you are currently grappling with this decision, get in touch. Top of Form