- The government is expected to announce it is reviewing university funding: MPs have called for fees to be cut or frozen, and for the interest rate on student loans to be slashed.
- A graduate on the average starting salary wouldn’t benefit at all from either of these things - even if the interest rate was cut to 0%.
- Graduates would have to earn £30,000 on leaving university in order to benefit from a rate cut. Even then they’d save £8,500 over almost 30 years.
Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown:
"Cutting fees or the interest rate is like offering students free beer – and then serving it in a colander: it sounds great in theory, but the reality would be something of a let-down."
"The vast majority of graduates will never pay off their fees in full, so by changing the interest rates or cutting the fees, in most cases you are simply reducing the amount that is written off after 30 years. The only students who will benefit from either change are the higher paid."
"The current system is clearly damaging to graduates, who start their adult life with a huge burden of debt. And while most will never repay it, it can still have a detrimental impact. These loans are often taken into account when calculating mortgage affordability, so can stand in the way of first time buyers. They also have a psychological impact – tempting graduates into more debt, and acting as a barrier to saving or investing for the future."
"The right solution depends on the problem the government is trying to solve. If it wants to help students on lower incomes, it would be more effective to address the gap between the current maintenance loan and most living costs – either with loans or grants. If the government wants to ease the burden on students on lower graduate starting salaries, one answer may be to raise the threshold at which interest and repayments start."
"More beer isn’t the answer. They need a more effective vessel."
The current sliding scale puts the interest rate at between RPI and RPI+3% depending on your income. Average RPI is currently 2.73%, and long term typical wage growth 4%.
The average student – earning £23,000 - will have repaid £62,879 by the time their debt is written off after 30 years. Even if the interest rate was at 0% (plus whatever is dictated by the sliding scale), they would repay exactly the same amount by the end of 30 years – and just have less money written off.
Those earning £30,000 at graduation would go from repaying £99,272 within 30 years and having the rest written off, to repaying 16 months early and saving just over £8,500.
Those earning £45,000 or more at graduation are the ones who would gain the most. They would repay £145,757, and have paid off their debts within 21 years and one month. If the rate is reduced to 0% (plus the sliding scale), they would pay £79,155 and be paid off in after 19 years.
Similarly cutting fees to £6,000 would also make remarkably little difference except to the highest paid. Someone on the average graduate starting salary and someone earning £30,000 would pay exactly the same as they do under the current system, while someone earning £45,000 would have their repayments cut to £100,995 and have repaid in 22 years.