Graduates pay more as the repayment threshold for loans drops

Hundreds of pounds a year will be cut from graduates’ door-to-door payments following the government’s decision to lower the repayment threshold for student loans in the UK, hitting most earners average income while benefiting higher-paid people.

The Department for Education on Thursday announced it would reduce the salary threshold for loan repayment from £27,295 to £25,000, and increase the loan forgiveness period for student loans from 30 to 40 years. The changes will affect students starting college next year.

The changes were announced in a long-awaited response to the Augar Review, an investigation into the higher education sector that released its recommendations in 2019.

Michelle Donelan, minister for higher and higher education, said the changes were “to bring fairness to the system” and to prevent outstanding student debt from being “paid by taxpayers”. .

But Paul Blomfield, chairman of the all-party parliamentary group for students, said the approach would “cost graduates, with the lowest earners hardest hit”.

The government will also cut interest rates on student loans above current inflation, allowing graduates not to have to pay back more than they borrowed.

Present, graduates earning over £27,250 must contribute 9% of their salary to pay off their student loans. After 30 years, the loans will be written off.

Government estimated that 54% of student loans will never be paid back, with the current value of outstanding debt at £161 billion.

Prime Minister Rishi Sunak wants to cut the cost of writing off outstanding loans and believes the new reforms will be “sustainable”, according to his allies.

However, Dr Gavan Conlon, from London Economics, an economic consultancy, calls the changes a “recession”.

“The graduates who will benefit the most from these policies are the top-earning, predominantly male recent graduates,” he said, adding that most others “will be worse”.

Conlon estimates that the government will recoup £540m per group of graduates as a result of changes in their working lives, equivalent to around 5% of total government spending, but distributed unevenly. even.

Under the current system, only the top-earning graduates cancel their loans, and real interest rates mean they stay in the system and continue to repay, ultimately paying more and more. subsidies for people with lower incomes.

A cut in real interest rates will mean that these earners will have to pay less. By contrast, extending the repayment term to 40 years would mean low- and middle-income graduates would have to pay off their debt over their entire working lives, Conlon said.

Martin Lewis, founder of Money Saving Expert, a financial advice platform, said lowering this threshold would cost the typical graduate more than £200 a year, while the extended repayment period would make increase repayment by thousands of pounds.

“It [the changes] he said:

The changes will not affect current students or graduates, after the government confirmed last month that their repayment threshold will be frozen at £27,250.

Lewis welcomed this but said the decision frozen up to 2025 will add around £5,000 to the total repayment at most.

Along with changing loan repayment terms, the government has released more details on a consultation on more flexible loans for higher education, which Donelan describes as “bringing a change.” revolutionary in the way students can learn, retrain and upskill throughout their lives.”

Other measures include the decision to freeze the tuition cap at £9,250 for two more years, effectively cutting funding to universities at a time of rising inflation.

The government will also consult on proposals to prevent students who will be students from accessing loan funds if they fail to pass GCSEs in English and mathematics.

Vanessa Wilson, chief executive officer of the University Alliance, says that “with any funding cut, there is something to give” in higher education. The minimum entry requirements will “fly with the needs of students and the economy and will be guaranteed to be lower, not increased,” she said.

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