Around three quarters of those students who started full-time undergraduate degrees in 2020/21 are not expected to fully repay their student loans. However, changes starting with the 2023 student cohort will see many paying more, and over half of new student loans are likely to be repaid in full.
English and Welsh students don’t make student loan repayments until their annual income exceeds £27,295, with repayment at the rate of 9% on the excess. After 30 years, any remaining debt is cleared.
The 30-year limit means that even someone with a good income may not make full repayment given the relatively high rate of interest that can be charged. This means it is often not worthwhile paying off a student loan any earlier than required.
The changes will come in for students starting their university courses from September 2023:
- The most contentious change is the extension of the repayment term from 30 to 40 years. This, in what has been described as a ‘lifelong graduate tax’, will see many students paying for their degree until retirement.
- Students will also start making repayments at a reduced income level of £25,000.
- The interest rate charged – it can currently be as high as the Retail Prices Index (RPI) + 3% – will be cut to just RPI for new borrowers.
The first two measures will increase the cost of student loans, especially for those lower earners who just earn sufficient to make repayments. There will be little difference for the lowest earners, but the interest rate cut will mean gains for higher earners who would have paid off their loans in any case.
If you have children leaving school this year, they might want to rethink any plans for a gap year. Starting at university this year will mean their student loan being repaid under the existing rules.
Changes in Scotland
Student loans will not change for Scottish students, although they already have a £25,000 income threshold following a large increase in 2021. New Scottish students have a 30-year repayment term, with the interest rate currently set at 1.5%.
A detailed analysis of the changes to the student loan system can be found here.