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Student loan shake-up: Graduates could end up paying more

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New university students will see big changes to the loans system, which could mean they'll be stuck paying off the debt into retirement.

The government has announced a radical shake-up of the university finance system in England to make higher education “fairer” for both students and taxpayers.

There are four areas which will change for new borrowers starting courses in 2023/24:

  • Interest rates set at RPI+0%
  • Tuition fee cap frozen at £9,250 for the next two years till 2023/24
  • Repayment threshold cut to £25,000 until 2026/27
  • Repayment term extended to 40 years.

What this means for new university starters

Essentially, graduates could find themselves paying off their student loans into retirement, as well as paying more off over the course of the debt.

Currently, you stop paying your student loan when you clear the debt, otherwise it’s written off after 30 years.

By extending the repayment term to 40 years, graduates could find they’re carrying the burden of student debt over their entire professional career.

“It also means fewer graduates will see some of their loan wiped out, and instead would pay off all of their debt plus the above real inflation interest”, Laura Suter, head of personal finance at AJ Bell warned.

By lowering the repayment threshold from the current £27,295 to £25,000 from September 2023 until 2026/27, more graduates will be caught in the repayment net (the threshold for existing Plan 2 borrowers will remain at £27,295 up to and including April 2025).

Suter said: “As many starting salaries will be at or above this level, it means more graduates will start repaying the loan as soon as they graduate, rather than having a couple of years of breathing space before repayments start.

“For many graduates the changes would mean the amount they pay back is more than double than under the current system. Someone with a loan of £45,000 on a starting salary of £30,000 would pay off almost £31,000 under the current system, but that would rise by £40,000 to £71,500 under the new system.”

Based on calculations by AJ Bell, the new system benefits very high earners who would pay off their loan faster and incur less interest over the term of the loan.

As an example, someone on a starting salary of £50,000 would pay off almost £117,000 under the current system, but only £62,000 under the new system.

“That will be of little comfort to the average graduate, who won’t earn anywhere near that amount when they leave university,” Suter said.

On the interest rate change, Suter said the decision to keep the peg to the RPI measure of inflation is “barmy”, adding that as it always runs higher than the CPI measure of inflation, “it’s a cynical way of the government boosting their coffers”.

The government confirmed the changes don’t apply to post-graduates.

The table below shows the difference in payments between the new and old system:

*Figures assume salary increases by 3% a year and that RPI is 3% a year.

‘Further squeeze for future graduates’

Rosie Hooper, chartered financial planner at Quilter, added that the student loan changes are an “unprecedented fiscal squeeze on future graduates”.

She said basic rate payers will face an effective tax rate of 42.25% for earnings above £25,000, meaning that for every £1 of income earned, they’ll only take home around 58p.

“This comes on top of the national insurance contribution hike and the income tax personal allowance freeze, which will both add a further squeeze on future graduates.

“Combine this with rampant property price growth, which has pushed the average first-time buyer deposit up to £53,935 in 2021 and you struggle to see how graduates will afford a house in certain areas without the help of the Bank of Mum and Dad.”

The government said the plan will “drive up the quality of university courses” while ensuring more students are paying back their loan in full.

It said that under the current system, more people than ever are going to university “but too often, students are racking up debt for low-quality courses that do not lead to a graduate job with a good wage”.

And with the cost of student loans increasing, with outstanding loans at the end of March 2021 reaching £161bn, the Department for Education said it is “taking action to tackle the problem head on, rather than passing the problem on to future generations”.

‘Fairer system’

The government said that currently only 23% of borrowers who enter full-time higher education next year are forecast to repay their loans in full, with the rest picked up by the taxpayer. It said taxpayers are funding 44p of every pound of student loans issued to full-time undergraduates. In future, taxpayers will fund less than 20 pence in the pound of the new loans issued each year, and more than half of students will repay their loan in full.

Higher and further education minister, Michelle Donelan, said: “We are delivering a fairer system for students, graduates and taxpayers as well as future-proofing the student finance system. We are freezing tuition fees and slashing interest rates for new student loan borrowers, making sure that under these terms no-one will pay back more than they have borrowed in real terms. This Government is delivering on its manifesto pledges.”

Just yesterday the government revealed proposals to introduce minimum entry requirements in order for students to access finance for higher education.

Under the proposals, students who don’t score at least a Grade 4 (a C in the previous grading system) in GCSE (or equivalent) maths and English or at least two Es at A-Level (or equivalent) will be blocked from accessing student loans if they apply for university later on.

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