New student loan rules will double repayments for many

•    New student loan proposals could see term extended to 40 years and repayment threshold reduced to £25,000
•    Interest would be RPI inflation, lower than the current rates
•    The move would add £40,000 to the loan costs of someone on a starting salary of £30,000
•    It means graduates could still be paying off their loans in retirement

Laura Suter, head of personal finance at AJ Bell, comments on the planned changes to the student loan system:  

“These changes might seem like small tweaks but they would dramatically change how much students will pay for their loans over their lifetimes. The decision to extend the period until they are written off from 30 years to 40 years would mean that graduates could easily still be carrying the burden of student debt into their retirement. It also means that far fewer graduates will see some of their loan wiped out, and instead would pay off all of their debt plus the above real inflation interest.

“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. 

“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 impact of loans continuing for far longer will be dramatic on many people’s finances – any money they are paying towards loans each year is money they can’t put into pensions, longer-term savings or paying off the mortgage.

“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.

“The Government has tackled the thorny issue of high interest costs on the loans. But the decision to keep the peg to the RPI measure of inflation is barmy, considering it’s been branded inaccurate and flawed by the organisation that produces it. But as it always runs higher than the CPI measure of inflation it’s a cynical way of the Government boosting their coffers.”

*Figures assume salary increases by 3% a year and that RPI is 3% a year.

How the new system would change repayments for graduates: