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Student loan threshold frozen

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The student loan repayment threshold for England and Wales has been frozen at £25,000 until 2027, to the detriment of many new university students this September.

Increased numbers of UK students are going to university due to good A-level results and fewer international students, which means this freeze will now affect even more people.

Repayment

Repayment starts the April after a graduate has left university. So, with a three-year course, this year’s cohort of students will not start repaying loans until 2028 at the earliest:

  • Freezing the £25,000 threshold – rather than increasing it in line with inflation or wages – brings graduates into the repayment net earlier than would otherwise be the case.
  • After 2027, the government may increase the threshold in line with inflation, but this will still mean a few years of fiscal drag.

Under the new repayment rules introduced in 2023, students do not start to repay their student loans until they are earning over £25,000 a year (£2,083 monthly).

Once earnings exceed £25,000, repayment is at the rate of 9% on the excess. Interest is added to the loan from day one, with the potential repayment term running to 40 years.

Self-funding

Wealthier parents will want to know whether they should be self-funding their child’s university fees and living costs, rather than taking out a student loan. However, the decision is far from straightforward given that the normal debt rules do not apply here.

For example, parents might pay the full cost of university education of approximately £60,000, but if their child never earns more than the repayment threshold then self-funding will have been a massive mistake. The problem, of course, is estimating earnings for up to 40 years into the future.

A compromise strategy is to take the full student loan, and then for parents to look at paying the loan off early after graduation. They would only do so if it looks like their child is going to have a high-earning career. However, this is a complex area of pros and cons, depending very much on personal circumstances.

Guidance on repaying student loans can be found here.

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Student loan rule changes from 2023

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Around three quarters of those students who started full-time undergraduate degrees in 2020/21 are not expected to fully repay their student loans. However, changes starting with the 2023 student cohort will see many paying more, and over half of new student loans are likely to be repaid in full.

Current rules

English and Welsh students don’t make student loan repayments until their annual income exceeds £27,295, with repayment at the rate of 9% on the excess. After 30 years, any remaining debt is cleared.

The 30-year limit means that even someone with a good income may not make full repayment given the relatively high rate of interest that can be charged. This means it is often not worthwhile paying off a student loan any earlier than required.

New rules

The changes will come in for students starting their university courses from September 2023:

  • The most contentious change is the extension of the repayment term from 30 to 40 years. This, in what has been described as a ‘lifelong graduate tax’, will see many students paying for their degree until retirement.
  • Students will also start making repayments at a reduced income level of £25,000.
  • The interest rate charged – it can currently be as high as the Retail Prices Index (RPI) + 3% – will be cut to just RPI for new borrowers.

The first two measures will increase the cost of student loans, especially for those lower earners who just earn sufficient to make repayments. There will be little difference for the lowest earners, but the interest rate cut will mean gains for higher earners who would have paid off their loans in any case.

If you have children leaving school this year, they might want to rethink any plans for a gap year. Starting at university this year will mean their student loan being repaid under the existing rules.

Changes in Scotland

Student loans will not change for Scottish students, although they already have a £25,000 income threshold following a large increase in 2021. New Scottish students have a 30-year repayment term, with the interest rate currently set at 1.5%.

A detailed analysis of the changes to the student loan system can be found here.

Photo by Brooke Cagle on Unsplash

Student loans – normal debt rules do not apply

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The issue of student loans weighs heavily on students and their families, and even political parties – remember the Lib Dems? But the name itself has created misunderstanding about how they operate and the best way to manage them.

A recent article published by MoneySavingExpert.com debunks some of these common myths. Because normal debt rules don’t apply, a student loan should usually be taken instead of self-funding fees, and it is generally not worth trying to pay a loan off early.

This approach to student debt is, of course, the complete opposite to the approach towards normal debt, such as borrowing to buy furniture. The misconceptions surrounding student debt are because the amount borrowed to pay fees and living costs are largely irrelevant; what is important is how much has to be paid back. Also, in regard to student loans:

  • There are no debt collectors;
  • There are no entries on credit files; and
  • The impact on mortgage affordability checks is not the amount of debt but just the value of the repayments.

Repayment

English and Welsh students don’t make any repayments until annual income exceeds £27,295, with repayment at the rate of 9% on the excess. So only those with reasonably well-paid jobs pay back the debt. After 30 years, any remaining debt is wiped out.

Anyone nearing retirement is in a very appealing position if they take out a student loan to study for a degree. Unless they will have substantial pension income, they will never have to repay.

Do not self-fund

Given the way student loans are repaid, self-funding university costs can be a bad idea. Self-funding means 100% of the costs are paid, but someone who earns less than £27,295 will effectively get their degree for free.

Even worse is where parents borrow to avoid taking out a student loan – it is much better to help out children later in life with a mortgage deposit.

Early repayment

Although it is usually a good idea to repay debt as quickly as possible, this may be a bad decision when it comes to a student loan.

Overpaying a student loan each month is pointless if that person will not fully repay the loan within 30 years. Even someone with a good income may not make full repayment given the relatively high rate of interest that can be charged.

Guidance on repaying student loans can be found here.

Photo by Honey Yanibel Minaya Cruz on Unsplash