UK Government’s Student Loan System Undergoes Major Changes

Share This Post

In a bid to reform the existing student loan system in England, the UK government has recently unveiled plans that will lead to an increase in repayments collected from future graduates. The Institute for Fiscal Studies had previously predicted that only 55% of the government’s expenditure on fees and maintenance loans would be repaid, with taxpayers bearing the brunt of the rest. However, this estimated taxpayer contribution has surged even further.

The proposed changes aim to sustain the current system, wherein students are not required to make upfront fee payments, and every student is eligible for a loan to cover a portion of their living expenses. Nevertheless, an alternative approach, likened to a “graduate tax,” could offer similar outcomes while taking into account the preferences and concerns of students. This new strategy would also have less adverse effects on lower and middle-income earning graduates, and it would allow the system to eliminate the use of terms such as “debt” and “loans.”

The existing student loan system has proven to be complex and poorly understood, even among current students who have availed of it. Upon graduation, students find themselves burdened with significant debts, with the average debt for students who completed their degrees in 2020 in England reaching £45,000. The exact amount owed depends on factors like the number of years of tuition fees covered and the borrowed living expenses, with students from lower-income households often needing to borrow more, resulting in higher debt upon graduation.

As interest accumulates on the outstanding balance each year, the debt continues to grow. However, repayments are tied to graduates’ income. Presently, graduates earning below £27,295 are exempt from making any repayments, while those with higher incomes are required to contribute 9% of their earnings above this threshold. This mechanism links repayment amounts to salary, resembling the calculation of income tax. Moreover, graduates’ outstanding debts are forgiven after a 30-year period.

The government intends to introduce several modifications to the system. This includes reducing the earning threshold for repayments to £25,000, extending the loan repayment period to 40 years, and capping the maximum interest rate on student loans for new students starting from the 2023-24 academic year.

Notably, these changes will not affect students starting their studies in autumn 2022, current students, or those who have already graduated. Nevertheless, it is likely that they will face higher payments in the future due to an alteration in the way the repayment threshold is updated over time.

To understand student preferences, researchers at the University of Essex conducted a survey in 2018 among over 600 final-year students when the government initiated a review of post-18 education and funding. The aim was to gather evidence on students’ comprehension of the system and the trade-offs they would be willing to accept if changes were made without altering taxpayer contributions.

The proposed lowering of the repayment threshold was met with strong resistance from students, who expressed a willingness to accept higher total debt and repayments in exchange for a higher threshold that protects their disposable income when earnings are low.

Another major change entails future graduates waiting 40 years before their outstanding debt is written off. This will have no impact on high earners, who will complete repayments within 30 years, or very low earners, who will still earn below the repayment threshold after three decades. However, low and middle-income earners will experience increased repayments, as they are projected to earn above the repayment threshold in 30 years’ time.

The final significant change involves setting the maximum interest rate on student loans at the rate of Retail Price Index inflation, eliminating the growth of debts in real terms after graduation. This change is expected to be welcomed by students, who often face the psychological burden of growing debts.

Nonetheless, this alteration will only reduce the actual amount repaid among relatively high-earning graduates, as they are likely to complete their repayments before the debt is written off. It will have no significant practical effect on low and middle-income earners, as they will pay the same amount in real terms over 40 years.

Overall, the proposed changes indicate that higher earners will contribute less, while middle and lower earners will contribute more, both in total and earlier after graduation.

In contrast, the researchers proposed an alternative solution in 2018 that would achieve the same financial outcome while aligning better with student preferences. Termed a “time-limited and income-linked graduate contribution,” this system would require all graduates to pay a fixed percentage of their income above a threshold for a fixed period. This approach would reduce the repayment burden on lower earners and increase it for higher earners.

The suggested plan is akin to a “graduate tax,” though it was not recommended by the 2018 review. By adopting this system, the terms “debt” and “loan” could be removed from the system, and students’ future obligations at graduation would solely depend on their future earnings rather than their parents’ income.

Danielle Trigg
Danielle Trigghttps://newswriteups.com/
Journalist Danielle is a skilled journalist specializing in regional coverage across the United Kingdom. With her wealth of experience and in-depth knowledge, Danielle dives into the stories that matter to local communities. Her meticulous research and engaging writing style captivate readers, providing them with a comprehensive understanding of the dynamic business landscape. Danielle's commitment to delivering accurate and thought-provoking news sets her apart, making her an invaluable asset to the News Write Ups team. danielle@newswriteups.com

Related Posts

Understanding Muscle Tears: Causes, Treatments, and Prevention

Muscles, the resilient engines powering our physical endeavours, are...

Calls Grow for Expedited Road Safety Measures Near Davidson’s Mains Primary School

Parents near Davidson's Mains Primary School are intensifying calls...