Student Loan Company Plan 1 and Plan 2 Repayments

Dural123

First time posting on this Forum. I feel this has to be brought to peoples attention as it feels like it should be illegal.

I have an old student debt from 2007 of around 5k. I've paid some of this off, although SLC have stopped sending me statements so I don't know exactly how much is left. This is obviously plan 1 repayment.

I returned to university in 2013 and have recently graduated. I think my debt is around £35k but I have never received a statement breaking down what I owe or even a total. This is Plan 2 repayment.

Since graduating I have started a business and I'm the Director of my limited company. I'm paying my self a wage but this is below the threshold for student loan repayments. HMRC sent me a letter telling me that as an employer I have a duty to inform them if my employees have a student debt and I must make the deductions. Thats all very well and good as my wage is below the threshold. At the end of the year I'll calculate my earnings, which includes dividends, so my repayment amount can be calculated. Thats all fine I'll pay what is due once my end of year accounts are completed.

My grievance is that they are forcing me to pay off plan 1 first, the plan with considerably lower interest. The knock on effect of this is that I must clear 5k before I can start paying off plan 2. Considering that 3% of 35k is over £1000 my plan 2 debt could spiral before I've paid off plan 1. Is this legal or just incredibly unfair? This will keep me in debt until the debt is wiped in 30 years, which is probably the intention of student loans in the first place.

Is there a way of paying off plan 2 first? Any help / advise would be greatly appreciated

Pixie5740

Some would argue that setting yourself up as a limited company director to reduce the amount of income tax and national insurance should be made illegal.

I had both pre-1998 student loans and Plan 1 students loans and SLC wanted me to repay them simultaneously so I did. In your scenario it sounds as though because both your loans are collected via HMRC that you pay off the oldest loan plan first and then the second. There's probably something about that in the T&C you agreed to but since I can't read your T&C from here you'll need to check yourself.

Can't you login to your Plan 2 SLC account and make a debit card payment to reduce the balance or does it just show was one big account (Plan 1 + Plan 2) when you login?

Ed-1

Dural123 wrote: »

First time posting on this Forum. I feel this has to be brought to peoples attention as it feels like it should be illegal.

I have an old student debt from 2007 of around 5k. I've paid some of this off, although SLC have stopped sending me statements so I don't know exactly how much is left. This is obviously plan 1 repayment.

I returned to university in 2013 and have recently graduated. I think my debt is around £35k but I have never received a statement breaking down what I owe or even a total. This is Plan 2 repayment.

Since graduating I have started a business and I'm the Director of my limited company. I'm paying my self a wage but this is below the threshold for student loan repayments. HMRC sent me a letter telling me that as an employer I have a duty to inform them if my employees have a student debt and I must make the deductions. Thats all very well and good as my wage is below the threshold. At the end of the year I'll calculate my earnings, which includes dividends, so my repayment amount can be calculated. Thats all fine I'll pay what is due once my end of year accounts are completed.

My grievance is that they are forcing me to pay off plan 1 first, the plan with considerably lower interest. The knock on effect of this is that I must clear 5k before I can start paying off plan 2. Considering that 3% of 35k is over £1000 my plan 2 debt could spiral before I've paid off plan 1. Is this legal or just incredibly unfair? This will keep me in debt until the debt is wiped in 30 years, which is probably the intention of student loans in the first place.

Is there a way of paying off plan 2 first? Any help / advise would be greatly appreciated

They're not making you repay your plan 1 loan first. The repayment plans currently have different repayment thresholds. For plan 1 it is currently £17,495 (which goes up every April by inflation) and for plan 2 it is £21,000. You repay 9% of your income above the threshold for plan 1 if you hold loans under both plan types and repayments between the two thresholds go to your plan 1 loan whereas anything over £21,000 goes to your plan 2 loan.

See the bottom of this page on the repayments website (which you can log in to to see your loan balances so you don't need a statement): http://www.studentloanrepayment.co.uk/portal/page?_pageid=93,6678490&_dad=portal&_schema=PORTAL: I have a plan 1 and a plan 2 loan, how do my repayments work?

However the good news is the Government has frozen the plan 2 threshold at £21,000 for at least 5 years. This should allow the plan 1 threshold to catch up with it. After that they would have to allocate repayments above the new single repayment threshold to the higher-interest plan 2 loan first to maintain fairness (as don't forget plan 2 interest rates for individuals are determined by income), meaning it would in fact be plan 2 loans that get repaid first.

See also the below Freedom of Information request to see how this policy decision was arrived at:

https://www.whatdotheyknow.com/request/230088/response/579884/attach/4/Annex%202%20Submission%20Dual%20loan%20repayments.pdf

Note that they took precisely the fact plan 2 loans accrue higher interest into account when deciding the policy and how dual plan type repayments would operate.

Dural123

Pixie5740 wrote: »

Some would argue that setting yourself up as a limited company director to reduce the amount of income tax and national insurance should be made illegal.

Some would argue that yes but I have been contracted for 6 months by local government who offered me this payment structure. I don't think the tax reducing measures of a limited company quite outweigh the fact that the annual interest on my student loan is £1560!

You were right about logging on to my account. I can make voluntary payments to either plan as the debt is broken down between the two. This isn't the same as the payments to HMRC though. These cannot be circumvented by voluntary payments.

Thanks

Ed-1

Dural123 wrote: »

Some would argue that yes but I have been contracted for 6 months by local government who offered me this payment structure. I don't think the tax reducing measures of a limited company quite outweigh the fact that the annual interest on my student loan is £1560!

You were right about logging on to my account. I can make voluntary payments to either plan as the debt is broken down between the two. This isn't the same as the payments to HMRC though. These cannot be circumvented by voluntary payments.

Thanks

Can you give more details about how long you studied for with each student loan plan type?

If you started your plan 1 course after 1st September 2006 any balance remaining is written off after 25 years from coming into repayment. For plan 2 it is 30 years from coming into repayment.

So there's no need to pay anything off voluntarily. It's not a loan that you have to pay off in full. It is a loan that you contribute to depending on your earnings success after university.

It looks like your plan 2 loan is for a 3 year course so is quite big? It may prove incredibly hard to try and pay it off under the current repayment terms of 9% of earnings over £21,000 with the higher interest rate as the more you earn the more interest is added. The threshold freeze helps as it allows the plan 1 threshold to catch up over the next few years, allowing more of your repayments to go towards plan 2, so in the end you hopefully won't be repaying more each month because you have a plan 1 loan as the threshold won't always be lower than £21,000 (you need to hope for higher RPI over the next few years as the plan 1 threshold increases by RPI each year). If it's high enough to raise it close to £21,000 there's a high chance they'll merge the two thresholds. After that it may be wise to forget about your plan 1 loan and just treat your plan 2 repayments as a 30 year tax.

Dural123

Thank you for all these details. I have spoken with SLC and they confirmed exactly what you have written. HMRC gave me a very frank "YOU PAY PLAN 1 FIRST" which seemed unjust but your post does explain how and why the repayments are done in such a way.

I can make voluntary payments to plan 2 but I think paying the minimum required and waiting for the debt to clear in 2047 is the most viable option at this point in time.

Many Thanks

Dural123

Plan 1 was started in 2004 for three years. SLC confirmed this is wiped when I turn 65.

Plan 2 was started in 2013 so clears in 30 years (2047)

It just seems like the contributions you have to make will only clear the interest so if I actually want to bring this debt down then I will have to make voluntary payments on top. I weighing it up at the moment but I cant see my self being able to clear it for a long time so I may as well just pay the minimum and wait to win the lottery.

Would you know if HMRC can take a chunk of inheritance money to repay student loans or is it just earning (or is inheritance considered earnings?)

Thanks

Ed-1

Dural123 wrote: »

I can make voluntary payments to plan 2 but I think paying the minimum required and waiting for the debt to clear in 2047 is the most viable option at this point in time.

I agree. The plan 2 threshold freeze is coming to the rescue in your situation. It really would be unfair to repay above a threshold lower than £21,000 for a long time and then have to continue paying up to 2047. But the lower threshold should hopefully catch up to £21,000 over the coming years.

Ed-1

Dural123 wrote: »

Plan 1 was started in 2004 for three years. SLC confirmed this is wiped when I turn 65.

Plan 2 was started in 2013 so clears in 30 years (2047)

It just seems like the contributions you have to make will only clear the interest so if I actually want to bring this debt down then I will have to make voluntary payments on top. I weighing it up at the moment but I cant see my self being able to clear it for a long time so I may as well just pay the minimum and wait to win the lottery.

Would you know if HMRC can take a chunk of inheritance money to repay student loans or is it just earning (or is inheritance considered earnings?)

Thanks

Inheritance doesn't affect student loan repayments.

It's unfortunate depending on your age that you took a plan 1 loan out before 2006 as that changes what loan gets written off first. Is 2047 before or after you turn 65 as you could still have a plan 1 loan after your plan 2 loan gets wiped. How old are you?

Also how did you manage to take out a full 3 year loan for 2 courses as tuition fee loans are limited by previous study.

Dural123

I'm 32

I only took student loan in my second year of my first course so 2005.

And I had to pay the first year tuition fees of my second course due to my previous studies.

Ed-1

Dural123 wrote: »

I'm 32

I only took student loan in my second year of my first course so 2005.

And I had to pay the first year tuition fees of my second course due to my previous studies.

So really there's not much difference between when the two plan type loans get written off (2047 for plan 2 vs 2049 for plan 1) but the plan 2 loan will be written off slightly earlier than the plan 1 loan so really you'd want repayments first to go to plan 1 wouldn't you?