There’s no doubt that student loan repayments are a big part of any graduate’s life. So with the possibility that the income threshold for repayments on student loans could be lowered, the knock-on effect could impact a lot of people. Let’s take a closer look.
Will student loan repayments increase?
The Treasury is currently looking at ways to reduce the cost of student loans in England. In 2020, the combined value of outstanding loans reached £140 billion!
So understandably, the government wants to see if it can bring this figure down. One suggestion to enable this has been to lower the graduate repayment threshold from £27,000 to £19,000.
The idea behind this is that more graduates would make higher contributions. Therefore more contributions would be made over the 30 years before the student loans are written off.
If the threshold was cut from £27,295 (where it is currently) to £19,300 (the same as it was before 2012), the write-off would drop from £9 billion to just more than £5 billion.
At the moment this is just a proposal that the government is considering. There are other ideas being floated around. Things like cutting the interest rate on student loans to that of inflation, extending the repayment window or reducing student numbers.
No one has made any decisions yet.
What does it mean for your student loan?
If you are a graduate repaying your student loan, you will want to know how this could impact you.
It is important to note that the discussions about repayment thresholds are mainly focused on Plan 2 student loans.
As it stands, graduates who have Plan 2 student loans repay 9% of their income over £27,295 a year (before tax and other deductions). Student loans are then written off 30 years after the April they were first due to be repaid.
Therefore, the biggest impact of lowering the threshold for repayments is that it will affect low-income earners.
If you are a fresh graduate just starting out, starting your repayments earlier because of the lower threshold would be likely to eat up a significant portion of your disposable income. It could make it harder to plan and save. And it could impact the timescale in which you buy a home or contribute more towards your retirement savings.
Student loans would still be written off after 30 years. But the impact of paying them during a time when money may be a bit tight could have a lasting effect on your financial planning.
There is no need to panic if you are a student or a graduate who has yet to reach the existing repayment threshold. The suggestion to lower the repayment threshold for student loans is part of a larger exercise. For now, the government is just considering its options.
If changes are made in the future, then you need to remember that repayments on student loans are only a percentage of your income over the threshold. So you will only ever pay 9% of the portion of your income over the threshold – not 9% of your income as a whole.
And if your income was to drop below the threshold, then your student loan repayments would automatically be paused.
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