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How are student loan repayments changing in 2023?

The Department for Education (DfE) is introducing new rules for student loan repayments for students starting university from September 2023. This is part of a response to a 2019 review of the higher education system, and an attempt to tackle the problem of soaring national student debt.

With the nation’s student debt currently at £161 billion, and only around 25% of undergraduates starting courses in 2020-2021 expected to fully repay their student loans, the government believes that lowering thresholds and extending schedules will lead to more students repaying loans in full.

More students enter higher education every year, with many taking on debt for low-quality courses that don’t lead to long-term employment opportunities. This means the current loan system isn’t sustainable, but under the new system, an estimated 70% of students will be able to repay in full.

Current student loan repayment rules

The current rules for students in England and Wales give undergraduates a repayment schedule of 30 years. Monthly repayments won’t begin until the graduate earns more than £27,295 a year – if their annual income exceeds this amount, they will start repaying 9% of the excess every month.

Once you begin repaying a student loan under the current rules, any outstanding debt will be wiped after 30 years. With many graduates struggling to find high-paying jobs, even someone earning a good income may not be able to pay off their loans and the accumulated interest within this time.

For current and former students whose loans fall under these rules, there’s no need to stress about retrospective changes. The new rules won’t apply to student loans taken out for academic years prior to 2023-2024. However, the threshold for Plan 2 repayments – which applies for students who went to university in England or Wales from September 2012 – is frozen until 2025 at £27,295.

New student loan repayment rules

The major changes to student loan repayments that will take effect from September 2023 include:

  • Freezing tuition fees at £9,250 a year until 2025
  • Lowering the repayment threshold to £25,000
    per annum
  • Extending the repayment term by a decade to 40 years
  • Capping the interest rate according to the RPI
    (Retail Prices Index)

The most contentious change is that future students will have to continue making repayments for 40 years before any leftover debt is wiped. Additionally, they’ll have to begin repaying their loans sooner due to the reduced threshold. This means they’ll have to repay more over a longer period.

However, students starting university between 2023 and 2025 won’t have to worry about higher tuition fees, as they’re frozen at the current rate until then. There’s also the benefit of less interest, so these students may actually pay less over time than those under the current plan, who could be paying as much as RPI + 3% accrued on top of their actual tuition and maintenance loan balance.

Who will be affected by the student loan repayment changes?

As mentioned above, the most recent student loan changes will only affect new students who start a university course in September 2023 or later in that academic year. Undergraduates who plan to complete their course in the 2026-2027 academic year will be the first to experience these effects.

Theoretically, the new student loan repayment system should drastically increase the number of graduates who repay their loans in full before the expiration of the repayment term. In real life, some economists believe this will only have a positive impact on high earners, who could afford to repay their loans anyway, while low to middle earners will be saddled with higher repayments.

Due to the changes in interest rates, higher earners will accrue much less interest and repay faster, while lower earners will repay more over their lifetime. This is a bigger burden for such graduates who are trying to save for their future, limiting their ability to buy a house or invest in a pension.

However, the average graduate salary is still below the new threshold – though it may not seem like much of a plus side that most students won’t be earning more than £25,000 a year after graduating.

It’s worth noting that these changes affect domestic undergraduates only. They will not apply for international students, who can’t access government loans, or for postgraduate students, whose degrees will have different repayment plans. Nor will they apply to student loans in Scotland – where students start repaying at a £25,000 threshold, with a 30-year term and 1.5%
interest rate.

Is taking out a student loan in 2023 worth it?

If you, your child, or a family member plans to go to university in the near future, they might find it beneficial to start a course during the 2022-2023 academic year. After that, they’ll be subject to the new student loan repayment terms, meaning they’ll have to start repaying higher amounts sooner.

Similarly, sixth form college leavers who planned to take a gap year before going to university in 2023 might be better off scrapping those plans to stay within the current system’s repayment rules.

In any case, whenever the university course starts and however much you’ll owe in student loans, taking out tuition and maintenance loans from the Student Loans Company is still better than relying on commercial loans. You can learn more about this in our blog on student debt rules.

If you’d like more information on the changes explored in this article, click through to read the relevant report by the Institute for Fiscal Studies. For graduates already in employment, who may be in need of financial advice
to help manage student loan repayments and arrears, the team at GBAC
is always happy to offer expert guidance. You can get in touch with us whenever you’re ready.