Student loan double-whammy leaves wealthiest graduates better off

-The government will cut the student loan repayment threshold from £27,200 to £25,000 from the 2024/25 academic year.

-It will also increase the period the loans have to be paid before being written off – from 30 years to 40 years.

-Instead of the current situation where around one in four people repay their loans in full, about half of them will.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown comments on today’s news announcement from the Goverment: 

“This will be a horrible double-whammy for students, and their parents. Most graduates will repay thousands of pounds more, as the government takes a chunk of their earnings for almost their entire working life. The only real benefit will be for the top-earning graduates.

The government is proposing cutting the interest rate on student loans in an effort to soften the blow, but it’s still going to leave millions of students worse off. The sky-high interest rate has been a bugbear among graduates for years. It’s linked to the RPI measure of inflation, which is higher than the CPI rate the government uses for things like benefits. It can also be as much as RPI plus 3%, which in a low interest rate environment has been a spectacularly expensive rate of interest. However, today’s announcement will hit most graduates far harder than even the most ridiculous interest rate would have, because of the way the loans work.

Right now, three quarters of students are expected to hit the thirtieth year after graduation and have huge debts written off. Under the new plans, they would continue paying for another decade. It effectively turns it into a graduate tax, payable for most of their life.

It’s already difficult enough for graduates to cover the cost of student loans on top of the horrible expense of starting out in their adult life. It makes everything harder, from getting onto the property ladder to saving for emergencies. By introducing repayments at a lower threshold, it puts the squeeze on graduates on lower starting salaries.

By pushing repayments into their 60s, it could also seriously damage their opportunity to pay into a pension later on, so they pay for their university education for the rest of their life.

The only students guaranteed to reap the rewards of the change are the high fliers who currently repay their loans in full. They also face a higher interest rate than lower earners under the current system, because the rate starts at RPI, and rises on a sliding scale to RPI plus 3% for those making over £49,130. This would mean they pay thousands of pounds less in interest. It’s an interesting group to give a boost to, while leaving lower earning graduates worse off.

It leaves parents in an incredibly difficult position. Previously, so few would pay off their loan in full that most were better off not paying their children’s tuition fees, and encouraging them to get whatever maintenance loan they were entitled to. Those who wanted to help their children make a start in adult life were encouraged to focus their efforts on topping up their living costs and helping them get onto the property ladder.

Now parents will have a much more difficult calculation, on the basis there’s a 50:50 chance their children will repay their student in full – plus interest. Unless they’re confident they understand their offspring’s earning potential throughout a 40-year working life, and their likelihood of making a career change or taking a break at any stage before their 60s, working out whether it’s better to pay the fees or help in another way can only ever be guesswork.

To make matters worse, if they decide to cover the cost of university, those whose children are set to start their studies in 2024 have very little time to get the money together. For those who had been saving and investing for a property goal a few years after graduation, paying university costs instead would drag their plans forward dramatically, which could mean a serious rethink of how they have been saving and investing towards this goal.”


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