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, graduates will pay more towards their student loans each year and the length of time that students 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!) For the same cohorts, the interest rate on student loans will be reduced to the rate of increase in the Retail Prices Index (RPI), a large cut of up to 3 percentage points. Maximum tuition fees will be frozen in nominal terms until the 2024/25 academic year, capped at £9,250 for the next two years and will not rise with inflation.
These changes will transform the student loans system. While under the current system, only around a quarter can expect to repay their loans in full, 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 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 raise trust in the system.
The reform also makes the system much more transparent for student. For most, it is now appropriate to think of their student loans as more akin to more familiar consumer or mortgage loans. That is because a majority can now expect to pay off the loan at some point, rather than have it written off. Alongside the cut in the interest rate this also means that repayments will more closely correspond to amounts borrowed.
The Department for Education (DoE) said that the changes would ‘rebalance the burden of student loans more fairly between the student and the taxpayer and ensure that in future graduates don’t pay back more than they borrowed in real terms’.
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.’