Martin Lewis: 'This is a big increase to the cost of uni' – Government makes sweeping reforms to the student loan system in England
The Government has announced sweeping changes to the student loan system in England that will drastically increase the cost of education for those attending university, including lowering the repayment threshold to £25,000 a year and increasing the length of time over which graduates repay their loans by 10 years.
The reforms, announced on 24 February, will also see the student loan interest rate cut to the Retail Prices Index (RPI) rate of inflation for students starting courses from 2023/24, while tuition fees will be frozen at £9,250 for another two years.
The measures are part of a long awaited Government response to an independent review of the higher education system by the banker Philip Augar in 2019. They will affect those starting uni from September 2023.
Below MoneySavingExpert.com founder Martin Lewis gives his thoughts on the reforms as well as detailed analysis of the key changes – you can watch his ITV student finance special from Thur 24 February to hear more on the exact impact of the changes.
Martin Lewis, founder of MoneySavingExpert.com, said:
"The plans will see most university leavers pay far more for their degrees over their lifetime than they do now. It effectively completes the transformation of student 'loans', for most, into a working-life-long graduate tax.
"The decision to extend repayments to 40 years, combined with the other measures, will leave most who start university straight after school still repaying it into their 60s. Bizarrely though, the Government has ignored my suggestion, in spirit supported in the Augar report, to at least be transparent and call this what it is: a 'graduate contribution system'.
"Since 1991, the cost of further and higher education has been effectively split between the individual and the state. Now the pendulum will again swing sharply towards the individual, who will pay substantially more for their education. The Government's own data shows the state's contribution to student loans will drop from 44p in the pound to 19p under the new system.
"So to anyone who finishes school this year and plans on taking a gap year to start in 2023, it's worth having a think. For most, starting this year will save you thousands of pounds over your working life compared to delaying."
On the situation for current and former students, Martin said:
"Yet, current and former students can breathe a slight sigh of relief. Having campaigned against negative retrospective changes – a call Philip Augar heeded and put in his report – I was very pleased when the Government told me it had listened. These changes won't hit current or former students, meaning at least that all those who will pay under the new system should be aware of it before they sign up.
"However, within the announcement it has snuck out the fact that those on Plan 2 loans (all those who've started university since 2012 in England and Wales) will see their repayment threshold frozen until 2025, which could add around £5,000 to the total most repay until the loan wipes."
On extending the repayment period from 30 to 40 years:
"Currently student loans are repaid until they are cleared, or for up to 30 years after university. Under the new system, 30 years becomes 40 years. Only around a quarter of current leavers are predicted to earn enough to repay in full now. Extending this period means the majority of lower and mid-earners will keep paying for many more years, increasing their costs by £1,000s. Yet the highest earners who would clear within the current 30 years won't be impacted."
On reducing the annual repayment threshold from £27,295 to £25,000 until 2026/27:
"University leavers repay 9% of everything earned above the threshold. Reducing the threshold, like reducing a tax threshold, means you start paying sooner and you repay more. While the very lowest-earning university leavers won't be affected, everyone who earns above the threshold will repay more each year than under the current scheme, typically by £207/year – reducing disposable incomes.
"This also will mean many lower to middle-earning university leavers will repay more in total as they will be repaying more each year and doing it for all or most of the 40 years.
"Yet for higher earners, who will easily clear the debt long before it wipes, paying more each year means they clear the loan more quickly, and therefore pay less interest, reducing the total they repay.
"The big outstanding question here, though, is what will happen after 2026/27? The threshold is to be frozen until then, which means inflation will further erode the threshold in real terms. More certainty is needed about whether the threshold is then guaranteed to rise. If not for transparency, it should at least be called a 'variable threshold'."
And on interest rates being cut to RPI inflation:
"This is likely to be the most popular of the changes. It means there is 'no interest in real terms' as the rate is set at inflation. In other words, borrow enough to buy 100 shopping trolleys' worth of goods, and you only repay enough to buy 100 shopping trolleys' worth of goods at future prices.
"Though, the Government is sticking with the higher RPI measure of inflation, not the official, lower CPI [Consumer Prices Index] measure. It uses CPI as a basis when it is paying out – for example, with benefits – rather than when people pay it. So arguably, it has inflated the inflation rate.
"The primary beneficiaries of this change are those at the middle to higher end of the earnings range after leaving university. They are the only ones who repay all the interest added. Most low to mid-earners who won't clear their loans before they're wiped don't repay all the interest anyway, so won't financially gain from the reduction – though there will be a welcome psychological benefit of not seeing interest grow as quickly on student loan statements.
"This change, when combined with the new 40-year repayment period, will mean many more people will now clear their loans in full, rising from an estimated 23% under the current system to 52%, according to the Government, under the new."
Other changes include freezing tuition fees and the Plan 2 repayment threshold
Under the new plans, the Government has also announced a number of other key changes that include:
- Freezing tuition fees at £9,250 for a further two years – up to and including 2024/25.
- The repayment threshold for Plan 2 loans will be frozen at £27,295 until 2025. This means that students on Plan 2 loans (those from England and Wales who started university in or after 2012, including current students) will pay back thousands of pounds more.
- More reforms to further and higher education, including a lifelong loan entitlement for all ages.
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