Freshers starting university this autumn face higher costs for their education due to changes in student loan repayment rules in England. (Different rules apply in Scotland, Wales and Northern Ireland.)
Changes took effect last year, so don’t impact students who began degrees before September 2023. However, new students will experience significant differences in how they repay their loans compared to those who have just graduated.
The average student debt in England is £45,600, with some students owing £60,000, which covers both tuition fees (£9,250 a year except in Scotland) and means-tested maintenance loans. However, student debt is unlike conventional loans because repayments are a fixed percentage of earnings, not tied to the total debt.
For instance, a graduate earning £30,000 annually will pay the same amount each month regardless of whether they have a student loan of £5,000 or £50,000. Unlike conventional loans, unpaid debts are written off after a set period.
The revised system has graduates repaying their loans once their earnings exceed £25,000, down from the previous threshold of £27,295. This means that a graduate earning £30,000 will now repay £450 annually, compared to £243.45 under the old system. Additionally, the repayment period has been extended from 30 to 40 years, meaning some graduates could be repaying their loans into their 60s.
Higher earners are more likely to repay their debt within the original 30-year term, leaving those on lower and moderate incomes continuing to pay back for longer.
However, the government has revised how interest is calculated on these loans, capping the maximum interest rate at the Retail Price Index (RPI), a reduction from the previous cap of RPI plus three percentage points.
Regardless of the changes, focusing on paying down these debts doesn’t usually pay off, as it won’t reduce monthly repayment or necessarily ensure faster repayment. Graduates, parents or grandparents are generally advised to focus financial help elsewhere. Even under the new terms, it is still estimated that 48% of graduates won’t pay off their debt within the 40-year period, with the loans eventually written off.
