Martin Lewis: "Government student loan plans are a big increase to the cost of uni – it’s effectively a lifelong graduate tax for most."
The Government is today publishing its plans for the future of student finance in England, in response to the Augar Review of Post-18 Education and Funding. It plans to make wide-ranging changes impacting further and higher education students in England starting in September 2023 or later. Plans include freezing the repayment threshold for student loans at £25,000 for three years, extending the repayment period to 40 years and cutting interest rates to RPI.
Martin Lewis, founder of MoneySavingExpert.com comments
Martin is the former Head of the Independent Taskforce on Student Finance Information. A number of his and MSE’s proposals were backed and included in the Augar report.
“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 uni 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.”
The impact on current and former students
“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 uni 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.”
Martin’s analysis of the three big changes...
- Extending the repayment period to 40 years (from 30 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.”
- Reducing the annual repayment threshold to £25,000 until 2026/27 (from £27,295 currently). “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’.”
- Interest rates cut to RPI inflation at all times. “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, 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 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.”
Notes to editors
- In May 2019, the Government-commissioned Augar report on further and higher education was released, with detailed recommendations to change student finance in England. See Martin’s editorial comment on the report.
- MSE summarised its full submission to the Augar review in Martin Lewis’ blog: The five changes needed to improve the current student finance system.
- In 2015, the Government announced it would retrospectively change student loans in England, freezing the repayment threshold instead of uprating it in line with average earnings. See Martin’s blog at the time for why this was a ‘mis-selling’ of university education and his letter to the Prime Minister David Cameron. In 2017, the Prime Minister Theresa May reversed this change and increased the repayment threshold again.
- In 2019, MSE, together with the Russell Group of universities, called on the Government to scrap the current student loan statement, after 90% of poll respondents found its redesigned student loan statement, which focused on repayment rather than debt, helped them to understand the system.
- For more on how student finance works, see MSE’s Student Loans Mythbusting guide.
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