Student in the last decade? Martin Lewis questions the Chancellor about a hidden loan hike
Those who started university in and after 2012 should beware of 'hidden' student loan costs coming in from April, MoneySavingExpert.com founder Martin Lewis warns. Watch the latest clip from The Martin Lewis Money Show Live, in which he explains what is happening and questions the Chancellor on it.
ITV's The Martin Lewis Money Show Live – Thursday 10 February 2022
The clip above has been taken from The Martin Lewis Money Show on Thursday 10 February 2022, with the permission of ITV Studios. All rights reserved. You can turn on subtitles by selecting the keyboard image at the bottom right of the video. You can also watch the full episode on the ITV Hub.
Here's a full transcript of Martin's 'big briefing' on student loan costs
"Now this actually broke a couple of weeks ago, but there's been so much energy news I've had to do on the show I haven't had time for it, but it's very important.
"The student loan repayment threshold is to be frozen. Now that sounds like a good thing. But as you'll hear in a moment, for most it isn't. The freeze impacts people on 'Plan 2' and 'Plan 3' loans. Now Plan 2 is anyone from England and Wales who started university in or after 2012, including current students. Plan 3 are postgraduate loans in England and Wales, although to be honest, they've been frozen for a long time, so it's a bit less relevant – so I'm going to focus on the Plan 2.
"If you're on Plan 1 and Plan 4, which means either you started university before 2012, or you're in Northern Ireland or Scotland, your thresholds aren't frozen, they're going up as planned.
"So what does this mean? Well, everyone on Plan 2 loans who repays will repay more this year. And here's why: the current threshold is you pay 9% of everything you earn above £27,295 a year. We were set to see in April that this would rise with average earnings by 4.6%, which means you'd then pay 9% of everything you earn above £28,550.
"But the Government did this: it froze what you pay at the current threshold, that £27,295. Now this is a bit like when you pay tax; the higher the threshold, the better for you. So look here, this is the point. You were not due to pay 9% on this amount [between £27,295 and £28,550]. But because it's been frozen, you will now pay 9% on this gap, which is the £1,255 that you would not have otherwise paid if they hadn't frozen the threshold."
Martin: 'Everyone who repays Plan 2 student loans will pay £113 more this year'
"So let's get a little bit of a blackboard up here to do the numbers for you – 9% of £1,255 is £113. Everyone who repays Plan 2 student loans will repay £113 more this year. But that's just the start of it – it gets a bit more complicated.
"OK, here's the key. Unlike normal loans, with Plan 2 student loans, repaying quicker costs most people more. Now the reason for this is 74% of university leavers will not fully repay what they borrow, plus the interest, within the 30 years when it wipes. So for them, the system works like a 30-year tax, 9% above a threshold. So if you're going to repay on a lower threshold, that £113 more this year, well, you're just going to repay more, because what you repaid doesn't affect anything else; it's just the payment you make each year.
"So the Institute for Fiscal Studies says mid-earners will pay £2,000 more in total due to the one-year freeze. Even if it [the threshold] starts to rise next year, unless they catch up [with] the freeze this year, it's going to cost you £2,000 over the life of your student loan.
"But for those who earn enough – the highest earners – they will fully repay within the 30 years, so for them, because they're repaying more and repaying quicker, the interest has less time to accrue. So it actually saves them money. The highest earners save, those on less don't; so to summarise – the highest earners gain, low to middle earners lose, and the lowest; you don't go above the threshold, there is no change.
"Now, look, this could have been worse. They were talking about retrospectively dropping it to a £21,000 threshold. I was very, very concerned about that. So when this news came, I was actually relieved in a way. But I think that's because I'd been conditioned that it was going to be worse than it was. If I hadn't had that, I would have probably thought this was pretty bad.
"People have asked me: 'Will I again hire lawyers to investigate taking the Government to court over this, like I did in 2015?'. Well, I did it then because they froze the threshold, and that was a breach of promise in 2012.
"But because of this threat and the campaigning, they actually jumped the threshold up back in 2015 by so much that we're still above the initial promise, even with this freeze. And even if they froze it for three years, we're still above what they promised. So that court challenge wouldn't work. This could have been a lot worse. It's not great, but it could have been a lot worse.
"Now, of course, there's one question left. Is this a one-off freeze this year? Or will it last longer? So I grabbed my opportunity last week with the Chancellor to ask, when I was interviewing him about energy, 'Is this the end of it?', 'Is it frozen for this year?', 'Is it going to continue to go up?', 'Are you going to lower it any further?, 'What's happening with student loans?' – as it affects a lot of people..."
Here's a full transcript of Martin questioning the Chancellor on student loans
Chancellor Rishi Sunak said: "Currently, we have a system where every pound in loan that the taxpayer makes to students for those degrees, we only get, or the taxpayer only gets, less than half of that back actually. Only a quarter of all graduates repay the full amount of their loans.
"So we need to make sure the system is fair to everybody, and what we've got is a system where if you earn £27,000, which is above the average salary in this country – a basic-rate taxpayer average salary is about £24,000 to £25,000 – you know, hopefully that your degree has led to you earning that extra premium, it's reasonable that at that point, you start contributing back for the loan that you were given. And that's what the balance we're trying to strike there."
Martin responded: "I think the key worry, of course, is retrospective changes, because people signed up for contracts, any other contract you wouldn't be able to drop the threshold in this way. And I think going forward for new students is one case, but going backwards, a freezing, well, while people won't like it, just within those rounds. But if you start to cut it, that's a real red flag."
Mr Sunak said: "I think you make a good point. In general, retrospective policy changes are not something that governments like to pursue for the reason they kind of, you know, they don't seem fair to people, but this is about people who have already taken the loan and it's about what they pay in the future.
"You're right about policy that might affect future borrowers who haven't taken out a loan, and of course we would always look to treat people differently in those circumstances."
Martin: 'As for how long the threshold will be frozen, I just didn't get an answer on that one'
Back live in the studio, Martin concluded: "So trying to read the runes of what he [the Chancellor] said, I think it is unlikely that we will see a drop in the threshold for existing university leavers, but we may see a drop for new students in future that they have to publicise, and at least that would be transparent, alongside what was recommended in what was called the 'Augar Report'.
"As for how long the threshold will be frozen, I just didn't get an answer on that one."