Dual Plan Repayment Query

PomPom123

I have a Plan 1 student loan (balance aprox. £9k) and a Plan 2 student loan (balance aprox. £10k.

I’m trying to understand whether I’m repaying the loans correctly as I am charged a standard £17 on my Plan 1 every month, this isn’t more than interest accrued and so my balance is climbing around £1k each year. On the other hand I’m paying around £180 per month on my Plan 2 loan and so am reaching the capital.

Is this a payroll error? Shouldn’t the plans be more fairly split? Both loans were £9k when first taken out (Plan 1 in 2004 and Plan 2 in 2015) and so I feel I’m paying a significant amount but due to the split getting nowhere with the balance. This static Plan 1 repayment has only been in place since 2020 and the £17 is the lowest it’s been despite salary increases. Pre 2020 I paid more towards Plan 1 than Plan 2.

This isn’t a ‘graduate tax’ for me - I will end up repaying the balance for at least one of the loans due to the late write-off.

silvercar

The general rule is that everything paid between the thresholds goes to the plan with the lower threshold, everything above the higher threshold goes to the plan with the higher threshold.

The inequality of this has been discussed previously on this forum. When the gap between the thresholds is small, the amount going to the loan with the lower threshold shrinks. As your income rises, the proportion going to the loan with the higher threshold will be increasing over time.

Ed-1

https://forums.moneysavingexpert.com/discussion/6656418/dual-plan-repayment-query

The rules on 'division of repayment' between more than one loan are contained in regulation 18A:

https://www.legislation.gov.uk/uksi/2009/470/regulation/18A

In effect, repayments on loans with a lower repayment threshold are capped on income up to the higher repayment threshold.

silvercar

if you wished to make a voluntary repayment towards your loan, or even clear it, it is your choice entirely which loan you voluntary repay. I’m not suggesting this is a good idea as it depends on your circumstances, but that is the only time you currently have a choice which loan is receiving your money.

Though be aware, if you did clear the plan 2 loan, there wouldn’t be a cap on what you pay to your plan 1 loan.

silvercar

Currently (tax year 2025/2026) the plan 1 threshold is £26,065 and the plan 2 threshold is £28,470. So the difference is £2,405 a year; ~£200 a month. At 9% repayment that is £18 a month that should be going to plan 1. With anything over an annual salary (but calculated monthly) going to plan 2.

PomPom123

Thank you everyone. I feel like I’m bleeding money with this as I am predicted to pay off the Plan 2 loan in the next 15 years I believe. Does it make sense then to make voluntary repayments to the Plan 1 loan too to negate the interest? I think I will end up paying them both off assuming I have 25 more working years left.

2hc9kmju

Hi PomPom123,

If the numbers you have given are right, then your plan 2 debt balance sounds rather low? Unless you've been paying off a significant amount of the capital through monthly payments to date, or the course was very short?

At £180 per month, that infers a salary of around £52,000 and just shy of £2,200 per annum paid off the Plan 2 loan. I haven't done the detailed maths, but that implies you'll pay off the Plan 2 debt in about 6 years?

Obviously, when the plan 2 debt is repaid, then you would pay significantly more on the plan 1 debt

You're likely to pay off the plan 1 debt about 9/10 years after the plan 2 debt.

If the numbers you have quoted in your first post are accurate, then this is one case where it might be best to pay a lump sum on one or even both debts.

Paying off the plan 1 debt first would then reduce your monthly outgoings, though by a small amount £17. Paying off your plan 2 loan wouldn't reduce your current repayments, but would mean the plan 1 loan would be paid off in about 6 years.

Of course movements in the RPI will affect the interest (and thus balance) on your plan 2 debt - either extending or shortening the repayment period (higher RPI or lower RPI respectively), as changes in interest rate charged won't affect your repayments, but changes in your income would…

One thing to consider before paying off any student debt is what your personal plans are for the future and more importantly what may happen that means your payments may be lower (e.g. career break, caring for a family member, maternity/paternity leave, etc.) as this can substanitally extend the repayment period, even to the extent that you pay back less than the amount of the principal borrowed. In this case, any overpayment is likely to be wasted money as you may not repay all of the balance and interest before the debt "expires".

Hope this helps,

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81895355#Comment_81895355

If, and only if, you expect to clear both loans and you are working on this assumption, it makes sense to make overpayments to plan 2 first as that has the highest interest rate.