Consultation on early repayment of student loansSunday, July 3rd, 2011
The Government proposes to penalise students whose circumstances allow them to repay their loans early.
The existing repayment rules for student loans allow any student, at any time, to pay more than is required under their loan agreement. This may be possible, for example, because the borrower obtains a high-paying job and voluntarily repays more, or because the borrower’s family is able to contribute. In 2008/09, £329 million of the total £939 million repayments received by the Government were voluntary early repayments. The interest rate on loans has, until now, been set at the annual rate of the Retail Prices Index (RPI).
The Government’s reforms to the financing of higher education involve:
- applying a rate of interest according to the borrower’s income level, capped at RPI +3% (but still less than commercial borrowing rates),
- increasing the annual repayment threshold through the payroll to £21,000, and
- writing off any outstanding balance after 30 years.
The Government views its new student finance arrangements, not as individual, financially-viable loans to students, but as a single overall package, with the higher interest rates paid by higher earners financing the losses incurred from writing off the loans of lower earners. As a result, the ability of borrowers to repay their loans in full, having paid relatively little interest, is viewed as being detrimental to the overall financing of the loan scheme.
Proposals for imposing additional charges where loans are repaid early are set out in a consultation document issued by the Department for Business, Innovation and Skills on 28 June. It describes the student loan repayment mechanism as “progressive” and the early repayment of loans by those on the highest incomes after graduation as “unfair”.
Three options for “a more progressive mechanism for early repayment” are set out in the document. One is to charge a percentage levy on high repayments; another is to charge a percentage levy on repayments made by high earners, a third is a combination of the first two. To illustrate:
- charge a percentage levy on high payments, e.g. 5% of additional repayments made each year over a specified amount, such as £1,000, or a percentage of the outstanding balance
- charge high earners a percentage levy on additional repayments, e.g. 5% of any additional repayments made by borrowers with annual earnings that exceed £41,000
- a combination of the first two, e.g. 5% of additional repayments that exceed £1,000 if the borrower has annual earnings that exceed £41,000
There is no suggestion that the proposals would have an effect on the calculation of student loan deductions through the payroll. The levy, if introduced, would be added to the outstanding loan balance. However, the document does recognise that the proposals could have an impact on employer graduate recruitment schemes that offer financial assistance with the costs of student loans in order to attract talented graduates. The views of employers are sought with regard to this issue.
The consultation document is available at the link below and the consultation period ends on 20 September 2011.