- New student loan repayment system will see many graduates paying tens of thousands of pounds more due to additional decade of paying off loan
- Lower interest rate will only benefit highest earners who are able to pay off their whole debt
- Someone leaving university with £45,000 of debt, on a graduate starting salary of £30,000 and who sees a few payrises in their career could end up paying £46,500 more than someone who went to university last year
- How a gap year or a career break could reduce your overall student loan repayment
Laura Suter, head of personal finance at AJ Bell, comments:
“As people receive their A-level results on Thursday many will be excited to head off to university. But lots of people going to university this year will be looking down the barrel of far higher student loan repayments after changes to the system. Anyone starting university from September this year will be under the new loan system, which has seen a number of changes that only the highest earners benefit from.
“Under the new ‘Plan 5’ system, graduates will start to repay their loan when they earn £25,000, lower than the current £27,660 limit for the existing system. They will also have to repay their loan for a decade longer, as any debt will now be wiped out after 40 years rather than 30 years. However they will be charged a lower interest rate, as it will be set at the RPI inflation rate, rather than RPI plus up to 3 percentage points, which is the current system.
“But the lower interest rate only benefits those who are going to pay off their debt in full, as they will be charged less interest before they wipe out the debt. For huge swathes of people the lower repayment threshold and extra decade of repayments will add thousands to the cost of their student debt.
“Someone on a graduate starting salary of £30,000 who sees a few payrises in their career and leaves university with £45,000 of debt would pay £46,500 more in student loan repayments than someone who went to university last year. Equally, someone on a more modest £20,000 graduate starting salary who also saw a decent payrise every five years will repay almost £25,000 more under the new system.
“But those who would win big from taking a gap year are students going into courses that lead to higher incomes. For example, those going into economics, pharmacology or engineering could save tens of thousands of pounds under the new system, thanks to those changes to the interest rate charged on the debt. This benefits those earning the most, as they will pay off their loan in full under both the old and new systems, but with the new system they will incur less interest before they do.
“Anyone who never earns more than the repayment threshold, either due to low salary for their entire career or working part time, will never make a loan repayment and so won’t be affected by the changes in the system – although the lower repayment threshold from this year will mean fewer people fall into this category.
“However, the big bulk of middle earners who will never pay off the debt will face tens of thousands of pounds more in repayments over their lifetimes – leading some to question whether the university degree is worth it. Many will be paying off their debt into their 60s and will clock up 40 years of paying a 9% tax on some of their earnings.
“Frustratingly, it’s almost impossible for 18-year-olds to know how much they will end up repaying towards their loan or whether they will pay it off before the 40 year deadline as it depends what your starting salary is, how many pay rises you get, whether you take any career breaks and whether you work part-time during your career. This head-scratchingly complicated number of factors means that many people just sleepwalk into taking out the loans and worry about how much they’ll repay later.
“For example, as above, someone on a starting salary of £30,000 who sees a few payrises during their career will repay £46,500 more under the new system. But if they started their career earning £40,000 and saw the same pay rises, they’d actually benefit from the new system and pay more than £19,000 less.
“Equally, under the new system if that individual started on a salary of £30,000, saw a few payrises in their career but took a five-year career break* they make only half the loan repayments when compared to taking no career break – repaying £47,000 of debt rather than £94,000.”
*Assumes they take a five-year gap ten years after starting work and return to work on their previous salary.
