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Student Loan Rates Set to Soar: Department for Education confirms 7.1% Interest Rate

Student Loan

The Department for Education (DfE) has confirmed a 7.1% Interest Rate for Plan 2 and Postgraduate Loans from June to August 2023 up from 6.5% earlier in the year. Details can be found here.

Martin Lewis on Student Loans

This announcement comes as consumer finance champion Martin Lewis says “We must stop calling it a student loan”.

Mr Lewis is known as the founder of MoneySavingExpert.com a consumer finance information and discussion website which advises people on how they can manage their finances.

Over the weekend Mr Lewis opined:

“There is a fundamental misunderstanding about how student loans work, because they are demonised as debt, but under this plan they will work far more like a graduate tax. For most people, it will be like a 9% additional tax burden above the £25,000 threshold.

“Many university-leavers will end up repaying more than double what they do under the current conditions. In practice, the majority of graduates will be paying their student loans for most of their working lives.

“We should stop calling it a student loan. This is a tax. It is a hypothecated, limited form of taxation.”

Tuition Fees since 2010

Since the Conservatives came to power in 2010, the United Kingdom has witnessed a significant increase in tuition fees, leading to widespread debates and concerns regarding accessibility to higher education. This period marked a notable shift in the funding model for universities, with a move towards a more market-driven approach.

In 2010, the coalition government introduced a comprehensive reform of higher education funding, resulting in a substantial rise in tuition fees. Previously, universities in England charged a maximum fee of £3,290 per year. However, the new system allowed universities to set their own tuition fees up to a cap, which gradually increased over the years.

In 2012, the cap was raised to £9,000 per year, a decision met with protests and student unrest. This three-fold increase in tuition fees sparked concerns about the potential deterrent effect it might have on students from low-income backgrounds, discouraging them from pursuing higher education.

Further changes were implemented in 2017, when the cap was increased to £9,250 per year. This move generated further controversy and reignited discussions on the affordability and accessibility of higher education in the UK.

The increase in tuition fees was driven by a shift in the government’s approach to higher education funding. The rationale behind the reforms was to shift a greater share of the cost from taxpayers to students, with the expectation that graduates would contribute more towards the cost of their education once they enter the workforce.

Critics argue that the escalating tuition fees have placed a significant burden on students, leading to higher levels of student debt upon graduation. This has sparked concerns about the long-term financial implications and the impact on social mobility, as students from disadvantaged backgrounds might be deterred from pursuing higher education due to financial constraints.

Student Debt

According to studies, the average student debt in the UK has surged in recent years. Graduates now face the burden of repaying substantial loans as they enter the workforce. The repayment system, based on income thresholds, means that graduates begin repaying their loans once their earnings surpass a certain level.

Untitled
Source: House of Commons Library

While the income-contingent repayment system aims to make loan repayment more manageable, concerns persist about the long-term financial implications for graduates. With higher debt loads, graduates may face delays in making major life decisions such as purchasing homes or starting families. Additionally, the psychological stress associated with carrying significant debt can impact graduates’ overall well-being.

Final thought

For a party that came to power bemoaning Labour’s increases in public debt, Gordon Brown’s habit of obscuring liabilities from the public balance sheet and the breaking of fiscal rules, the Conservatives have certainly built a problematic stack of debt out of student loans.

The cumulative rise in the amount of student debt and the Government’s decision in 2020 to stop selling this debt means that the Government is left on the hook for loans incurred by students but due to the mechanism if their repayment, will often not be repaid at all.

What we’re left with is a system that weighs down students with debt that will effect their credit ratings without necessarily being paid back, tuition fees that cannot be increased in line with inflation and an unsellable debt pile that will likely only rise.

Perhaps this is the reason that Suella Braverman today has said “There’s no good reason why we can’t train enough HGV drivers, butchers or fruit pickers.” Presumably that’s as long as they aren’t trained at university.

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