Student Loan Early Repayment Charge to be ‘Postponed’

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The Government issued a consultation last year concerning proposals 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.  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 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.

The consultation contained three options for “a more progressive mechanism for early repayment”.  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.  At no time did the consultation suggest 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 and the views of employers were sought with regard to this issue up to the consultation close in September 2011.

A number of sources, including the BBC, have reported that the Business Secretary Vince Cable is set to announce that plans to impose penalties for early repayment are set to be abandoned.  We await confirmation of this from the Department for Business, Innovation and Skills (BIS).

Further Information

• BIS  – Consultation on potential early repayment mechanisms for student loans

Tags: BBC, BIS, Early Payment Penalty, Student Loans, Vince Cable

This entry was posted on Saturday, February 18th, 2012 at 17:45 and is filed under Students. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.