Think tank suggests scrapping student loan interest and increasing payback period to 50 years
The suggested plans are meant to bring down costs for students and graduates, but will they?
A centre-right think tank has submitted plans to the government that would see student loan interest scrapped and the repayment period extended to retirement age.
Under the existing system, student loans accrue interest at a rate RPI+up to 3% (currently up to 6.1%), while the repayment period is currently 30 years. After this time the debt is cancelled, no matter how much or how little you've repaid, meaning 77% of students will never repay the full amount.
The plans put forward by UK 2020 intend to “bring down costs” for students and graduates, but as always, it's worth digging beneath the surface to see whether or not these plans are all they're cracked up to be.
Will the plans actually benefit students?
At this point, the honest answer would have to be: it's hard to say.
When it comes to student loan repayments, there are a lot of factors at play. You need to account for inflation, salary growth and interest, as well as other changeable factors such as the maximum tuition fee, the repayment threshold and the grants and bursaries that are on offer.
In fact, just a few weeks ago Theresa May announced that tuition fees would be frozen at £9,250 for a year and that the repayment threshold for student loans would increase to £25,000 a year.
Frustratingly, UK 2020 don't mention whether or not their plans would use the existing repayment threshold (£21,000) or the proposed new figure.
Our student loan repayment calculator uses the existing figure, and we've found that UK 2020's new system would only benefit graduates that have a starting salary of around £26,000 or more. To put that into context, the current average graduate salary is just under £23,000.
Why it's tricky to say either way
We must stress that any estimates based on the new system are just that – estimates. There are a lot of factors at play, and plenty of unknown quantities too.
For example, student loans start gaining interest from the day you start uni. We're yet to see any figures that indicate what the average student debt would be without interest (as this system proposes), so it's difficult to calculate how much you'd be paying off in the first place.
That means that the figure we quoted earlier (that 77% of students will have their debt paid for in part or in full by the government) applies to the current system (which includes interest), and doesn't specify whether students are repaying whatever the original amount would have been without interest.
The best way to look at it would be: if you're likely to pay off the total amount you borrow (without any interest) by the time the 30 years is up, then you'd benefit from this new system. For everyone else, it probably means you'll end up paying more.
What's more, the small print reveals that you could still be making repayments after retirement if you're still earning over the threshold. This may not apply to the majority, but it's yet another factor to consider.
Oh, and let's not forget the ambiguous repayment threshold. Student loans are repaid at 9% of your earnings over the threshold (e.g. if you earn £22,000 with a £21,000 threshold, you repay 9% of £1,000), so a higher threshold would mean smaller annual repayments.
In turn, this would extend the time required to pay off the debt, meaning more graduates under this proposed system would be likely to reach retirement without having repaid their full debt.
Under the current system their loan would have been wiped at the 30 year cut off, but under this proposal graduates would still be paying 9% of anything they earn above the threshold for another 20 years.
So what's next?
For the moment, all you can really do is wait and see! At this stage the propositions are nothing more than that, and they may never be put into effect.
We'll be keeping a keen eye on how things develop, so if anything changes, we'll make sure to let you know!
In the meantime, check out our ultimate guide to student debt to make sure you understand everything as it is.