A degree of change

25 October 2022

With many Year 13 students currently completing their UCAS applications at this time of year, thoughts inevitably change to how parents will fund their offspring through the university journey.

On that note, the Government has announced the largest changes to the student loans system in England since fees were allowed to triple in 2012. Starting with the 2023 university entry cohort (that is, students currently in their final year of A Levels) graduates will now pay more towards their student loans each year and the length of time that students have to pay their loans back until they can be written off has been extended from 30 to 40 years (It’s one reason those who are near retirement, who don’t have a degree find it very appealing as unless they’ve a huge pension, they know they’ll never have to repay!)

In addition, the income threshold at which loan repayments begin will be lowered from £27,295 to £25,000, with graduates required to repay 9% of whatever they earn over that said threshold. It is intended that the hurdle rate will be frozen until 2026-27, following which it will increase in line with the Retail Prices Index (RPI). However, the interest rate on student loans will be reduced to the rate of increase in RPI – a large cut of up to 3 percentage points.

These changes will transform the student loans system. While under the current system, only around a quarter of students can expect to repay their loans in full, from next year around 70% can expect to repay under the new system. This is partly due to substantially higher lifetime repayments by students with low and middling earnings and partly due to less interest being accumulated on loans. The long-run benefit for the taxpayer (and the UK Treasury) will be around £2.3 billion per cohort of university entrants, as higher repayments by borrowers with low or middling earnings will be partly offset by lower repayments of high-earning borrowers.

The new system has much to recommend it. Lower interest rates mean that student loans are now quite a good deal for all students, whereas previously students whose parents could afford to pay the fees upfront, and who were confident that they would earn enough to pay back the loan in full, were substantially worse off using the loan system. This is no longer the case, which should hopefully increase trust in the system.

The reform also makes the system much more transparent for students. For most, it is now appropriate to think of a student loan as akin to the rather more familiar consumer loan or mortgage concept. That is because a majority should expect to pay off the loan at some point, rather than have it simply written off.

The Department for Education (DoE) said that the changes would rebalance the burden of student loans more fairly between the student and the taxpayer. Michelle Donelan, Higher and Further Education Minister, said: ‘We are delivering a fairer system for students, graduates, and taxpayers as well as future-proofing the student finance system. ‘We are freezing tuition fees and slashing interest rates for new student loan borrowers, making sure that under these terms no one will pay back more than they have borrowed in real terms”

Find out more about all aspects of student finance for undergraduates at gov.uk/student-finance