Martin Lewis has warned that millions of borrowers could be overpaying on their loans, cautioning that a significant number of people risk "throwing money away" due to the structure of a loan held by around five million individuals.
The financial expert issued the alert while speaking with Callum, a 32-year-old data consultant from London, who put his financial dilemma to Martin on the Martin Lewis podcast. Callum described having a "conundrum" over how best to manage his finances, and Martin's response carried a broader message for all listeners of the BBC podcast.
The Plan 2 Student Loan Issue
The issue centres on the so-called plan 2 student loan. According to Student Loan Company data obtained this year by the Financial Times, there are 5.4 million people with plan 2 loans, which Martin said amounted to about three-quarters of outstanding student loan debt.
These loans have attracted controversy as they predominantly charge above the rate of inflation. The Money Saving Expert website has likened them to a "stealth tax". The undergraduate loans were taken out between September 1, 2012 and July 31, 2023 in England, and since September 1, 2012 in Wales.
Key Advice for Borrowers
Callum sought Martin's guidance on whether he should prioritise clearing his student loan or his mortgage. Martin, speaking this week on the podcast, highlighted a "really important" caveat when considering whether to overpay on a plan 2 loan. He explained that it "depends massively on your level or earnings because it is your level of earnings that dictates the amount you repay each year, not your borrowing."
He explained that the loans get wiped after 30 years, and most people will not end up repaying them. In Callum's case, he is likely to do so because he is a high earner (on £99,000). But Martin says around 70 per cent of people will not repay in full in the 30 years before the loans wipe.
He said: "In that case, there is the plausible risk that overpaying your student loan will not actually reduce what you pay in the future and therefore will be throwing money away."
Repayment Thresholds and Rates
Government guidance states that the amount you repay on your student loan is determined by your income, the sum you earn before tax and other deductions, including bonuses and overtime. Borrowers repay a percentage of their income above the threshold for their loan type, which for plan 2 stands at 9 per cent.
On Thursday, the Department for Education confirmed that the plan 2 threshold was to be frozen, a move that has itself proved contentious, as rising wages driven by inflation mean more people will find themselves exceeding the threshold and beginning repayments. The department confirmed that the repayment threshold and lower interest rate threshold for plan 2 loans remains at £29,385 from 6 April 2027 to 5 April 2028. The higher interest rate threshold for plan 2 loans remains at £52,885, officials confirmed.
According to the House of Commons library, interest rates on student loans do not affect how much someone must repay each month. Monthly repayment levels are determined by a borrower's loan plan, their salary, and the country in which they reside. Plan 2 borrowers in the UK typically repay 9% of earnings above the current annual salary repayment threshold of £29,385, according to the library's figures.
Repayments are suspended should a borrower's salary fall below the threshold, and cease entirely after 30 years, at which point any outstanding loan balance is written off. In Callum's situation, Martin, a familiar face on ITV through programmes such as the Martin Lewis Money Show, suggested it would be wise to overpay on both his mortgage and his student loan, though the mortgage takes priority, since if he were to lose his job, for example, he would still be obligated to meet those payments.
