Student Loan changes to cost Middle Earners £30,000

The government’s student loan changes in England are set to markedly benefit higher-income graduates. The new repayments scheme will see high salaried graduates save £20,000 whilst middle earners are to pay £30,000 more, according to a report by the Institute for Fiscal Studies.

The proposed changes come into effect in the 2023-24 academic year and won’t be backdated to former graduates or students who began undergraduate studies before 2023.

Students expected to graduate from courses with higher expected incomes, such as economics, law, and medicine, would benefit from delaying their university entry by a year. Under the new 2023 repayment cycle, these graduates would pay lower interest over the course of the loan, netting a saving of £30,000 over the loan lifetime.

Conversely, students who are expected to go into lower-paid jobs would be better placed to enrol in undergraduate courses this year. Doing so allows these students to benefit from loan write-offs after 30 years as opposed to 40 years under the new structure. Undergraduates who enrol before the 2023 changes are also able to take advantage of a higher starting salary before having to make loan repayments.

For 2022 school leavers, incentives regarding whether to take a gap year or not will be highly dependent on their future expected income.

Lower income graduates hit hardest  

Ben Waltmann, a senior research economist at the IFS, said: “Student loans reform will reduce the cost of loans for the taxpayer and the highest earners, whereas borrowers with lower earnings will pay a lot more”. The definitive impact of the policy on Waltmann’s assets is highly uncertain and ultimately will be contingent on multi-decade government policy and economic developments.  

The IFS notes that the 2012 policy was more progressive, allowing a redistribution of wealth from high to low-income graduates. Whereas the new student loan scheme announced by Chancellor Rishi Sunak this spring is heavily weighted towards expected high earners.

The National Union of Students has heavily criticized the changes. Larissa Kennedy, the Union’s president, sees the new policy as ‘calculated cruelness’ whilst in the midst of a cost of living crisis.

“Ministers are saddling young people with unimaginable debt for the next 40 years of their lives. This is nothing more than an attack on the opportunity,” Kennedy said.

What exactly has changed in the new 2023 policy?

Right now, high-income graduates pay an interest rate set by the Retail Price Index (RPI) plus 3%. Under the new system, only the RPI rate will be used to set loan rates.

“Under the new system, most will just pay back what they borrowed – neither more nor less. This moves us away from something very much like a graduate tax to something for which the term ‘student loans system’ is much more appropriate,” the IFS said.

Previously the repayment period was capped at 30 years, with students paying back 9% of their earnings above the repayment threshold. Any outstanding balances after 30 years were written off. Under the new system, the repayment period has been increased to 40 years. The IFS predicts that 70% of graduates will fully repay their loans under the new system.

The IFS also clarified that the starting point for repayments has changed. Currently, graduates who earn above the £27,295 threshold start to make repayments. Under the existing structure, the threshold rises each year in line with average wage growth. However, the changes to the 2023 policy see the threshold increasing more slowly (based on RPI rates). The IFS predicts this alone could cost middle-earning graduates £10,000 in repayments over their loan period.

Author Bio: Daniel Tannenbaum

Daniel is a London-based financial consultant who has worked in fintech for over 10 years.