University graduates will start paying more of their student loans back as the student loan repayment term is set to be extended from 30 years to 40.
The salary cap is also set to be reduced from £27,000 to £25,000, meaning millions of students who begin their courses from September 2023 will be left paying thousands more towards their student loans.
The UK government has said student finance will be ‘put on a more sustainable footing’ ensuring students pay their loans in full.
It has also said it wants a ‘clampdown on poor-quality university courses that don’t benefit graduates in the long-term’.
Here’s everything This is Money knows about the upcoming student loan changes.
Student loan changes could mean low-income graduates pay more than £7,000 more towards their debt, as the UK government sets out its plan to tackle’poor-quality’ courses
What student loan changes are being made?
Future students will see huge changes in their student loan repayment schemes.
They will be subject to lower repayment boundaries and longer repayment schedules, as the government attempts to reduce the fast-growing national student debt, which currently stands at £161 billion.
Currently, undergraduate students are expected to begin student loan repayments when they earn an income of £27,000 per annum, but for new students this will be reduced to £25,000.
The student loan repayment term will also be extended to 40 years, meaning more students will pay their loans off in full. Currently, any outstanding debt is written off after 30 years.
The upcoming changes were outlined in a statement from the Department for Education, which added that the tuition fee cap would be frozen at £9,250 for a two years which would further reduce the real cost to students.
Why are the rules being changed?
The new changes will make the higher education system in the UK ‘fairer for students and taxpayers’, the Department for Education said.
Student loan debt in the UK hit £161 billion in March 2021, and the government has said it would rise to half a trillion pounds by 2043 without these changes.
Student loan debt in has increased sharply over the past 20 years as fees have risen
In recent years, more students have started going to university than ever before.
The DofE has said that too many students are accumulating a large amount of debt for lower-quality courses that don’t lead to graduate jobs with higher wages.
It said it wanted to tackle the rising debt crisis head-on, ‘rather than passing the problem on to future generations’.
Who will be affected by the student loan changes?
The proposed changes will come into effect from the academic year 2023-24, affecting new students beginning their undergraduates courses from September.
The new changes won’t be back-dated to former graduates, or students who began their undergraduate degrees before September 2023.
Domestic students who begin an undergraduate degree in September 2023 will be subject to the new student loan changes and will begin paying their loans off earlier and for longer
International students don’t currently have access to student loans through the government, which means the updated payment plans will only impact domestic students.
The proposed changes do not impact postgraduate degrees or PhDs, which have their own separate repayment plans.
How much interest do students pay on their loans and how is it calculated?
The proposed changes to student loans will mean many students end up paying back more overall.
But although they will pay back more of the balance of their loans, most will end up paying less interest on them.
Experts suggest the changes will cripple most graduates and make it more difficult to save for a house or invest in private pensions
This is because of a proposed change in the way interest on student loans is calculated.
At the moment interest is charged at the Retail Price Index plus three per cent, but in future this will be changed to RPI plus zero per cent.
The DofE said: ‘To make the system fairer for students, the student loan interest rate will be set at RPI+0 per cent for new borrowers starting courses from 2023-24, meaning that graduates will no longer repay more than they borrowed in real terms.
‘Combined with the continued tuition fee freeze announced earlier this month, a student entering a three-year course in 2023-24 could see their debt reduced by up to £11,500 at the point at which they become eligible to repay.’
Will the proportion of a graduate’s salary charged each month change?
In the current system, how much a student repays each month from their pay packet depends on which plan they are on.
The plan a graduate is on depends on where they are from in the UK or EU, what country they studied in and when they started their course.
Those on plans 1, 2 and 4 should expect to pay 9 per cent on anything they earn over the specified threshold.
For many graduates the changes would mean the amount they pay back is more than double than under the current system
For plan 1, the thresholds are £1,657 a month before tax and other deductions, whereas plan 2 has a £2,274 monthly threshold, with plan 4’s threshold of £2,083 a month, with current interest rates set at 1.25%.
Laura Suter, head of personal finance at AJ Bell, said the new system would dramatically change the student loan landscape for graduates, as many could easily still be carrying the burden of student debt into their retirement.
She said: ‘The move to lower the repayment threshold to £25,000 would mean that more graduates will be caught in the repayment net.
‘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.’
How much will the typical student now repay?
At the moment, only a quarter of students who started full-time undergraduate degrees in 2020-21 are forecast to repay their loans in full.
Laura Suter said: ‘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.
‘What’s more, assuming they leave university at the age of 21, they will be paying off £320 a month in their final year of the loan at the age of 61.
‘The new system would only benefit very high earners, who would pay off their loan faster and so incur less interest over the term of the loan, but also benefit from the lower, flat-rate interest rate under the new system.
‘For 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 added that the impact of loans continuing for longer will dramatically impact people’s personal finances as it will mean less money towards pensions, longer-term savings or paying off the mortgage.
Are there penalties for paying the loan off early?
There is no fee for paying your student loan off early. However, graduates should consider if this is the best option, as they may benefit more from a higher pension or a deposit on a house
There is no penalty for paying your student loan off early. However, experts say graduates should consider whether putting more money towards this earlier in life will benefit them financially.
Paying off a student loan early could save hundreds in interest, but with the rising cost of living and house prices, their savings could be better spent elsewhere.
Rosie Hooper, chartered financial planner at Quilter said: ‘The student loan changes are an unprecedented fiscal squeeze on future graduates.
‘The 40 year term is the biggest sting, as many graduates will be paying the 9 per cent tax for their entire professional career.
‘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.’
She added that most students will likely see the changes as ‘daylight robbery’ impacting graduates abilities to purchase houses, invest in their pensions or save for the essentials.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown added that the changes would make things more difficult for new graduates dealing with the costs of adult life.
She said: ‘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.’
Is the cost of tuition fees changing?
The current cost of tuition will be remaining at the current cap of £9,250 until the academic year 2025-26.
This should come as a relief to students who might have expected to see their tuition increase following the global Covid-19 pandemic, but experts have said freezing fees is not going to be enough to counter the drastic changes in repayment plans.
Rosie Hooper added: ‘Ultimately, [students] have done the right thing by studying to get into university in order to accelerate their career.
‘Now they are slapped with a 9 per cent tax that they’ll be paying off for most of their professional lives.
‘The government has also conveniently chosen to ignore the other recommendation of the Augar Review to cut tuition fees to £7,500. They are truly having their cake and eating it.’
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