Thousands of graduates who went to university after tuition fees were trebled are set to pay back £14,000 more than they expected due to changes to their student loan terms.
Tuition fees were hiked to £9,000 for those who went to university from 2012 onwards, with this increase coinciding with a new repayment system for loans.
But promises the coalition government made about how the loans would work have not been kept, with analysis by the Institute for Fiscal Studies (IFS) for The i Paper showing many graduates will pay thousands more than initially suggested.
Some campaigners claim students were “mis-sold” the loans and Martin Lewis, founder of the MoneySavingExpert.com website say the retrospective changes were “letting down a generation of students”.
He urged graduates to write to their MP to complain about the issue.
The issue has gathered steam in recent weeks, with growing anger from graduates – but there appears to be little political appetite to address their concerns.
Graduates now in their 20s and early 30s who took out loans from 2012, known as Plan 2 loans, pay 9 per cent of their income over a set threshold, and also pay interest of up to 6.2 per cent on their balances.
When the loans were launched, the earnings threshold at which graduates would have to start repaying the loans was set at £21,000 with the Conservative–Liberal Democrat coalition government promising this threshold would increase “annually in line with earnings from April 2016”.
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Information given to school-leavers at the time stressed this would mean “as the amount people earn increases, the £21,000 salary level rises in proportion so you’re effectively paying the same each year.”
But this promise has not been followed. Though there have been some increases to the repayment thresholds on an ad-hoc basis, including moving the £21,000 threshold to £25,000 in 2018, successive governments have frozen it on multiple occasions since 2016.
From this April, graduates will begin to repay their student debt when earning £29,385 a year or more – up from the current level of £28,470. However, from next year the threshold will be frozen again until 2030.
After that, the threshold will not move with average earnings, but will instead go up in line with the retail prices index (RPI) measure of inflation, under a decision made by the former Conservative government in 2022.
Wage growth is generally higher than inflation, so graduates on the whole will pay increasing amounts towards their loans over time, even if their salary increases are only in line with the national average.
It means students using various loan repayment calculators that were available in 2012 – and based calculations on the rules the Government promised – may have underestimated how much they would repay towards their debt.
The IFS analysis shows that someone finishing university having borrowed £42,000 and going on to a £20,000 starting salary – which would now have risen to £38,000 – could have expected to repay around £9,100 total – in 2012 terms – over 30 years if the initial rules had been followed.
But due to policy changes, they will actually repay around £23,900, which is £14,800 more.
Similarly, someone on a starting salary of £25,000 would have expected to pay around £26,400, but will actually repay £40,800.
Some very high earners will actually pay off less, because they will accrue less interest on their borrowing as a result of paying off higher amounts each month.By 2046/47, the first graduates to go to university under the new system would have their loans wiped after the end of the 30-year repayment period.
IFS analysis shows that if the threshold had risen in line with average earnings each year, as the initial rules said, it would reach around £60,719 by the end of the repayment period.
However, as a result of the rule changes, it is only likely to reach £43,739, meaning people will be paying loans back at lower salaries.
Martin Lewis, who has campaigned extensively on the issue, told The i Paper: “The Conservative government back in 2015 tried to freeze the student loan threshold at £21,000.
“I took legal advice at the time about taking the decision to judicial review, but thankfully, as the advice said I likely wouldn’t win, the threat of that and public pressure saw the then government relent and the threshold increased to £25,000.
“Since, we have seen successive governments breach the promise to increase the repayment threshold with average earnings, as well as many other breaches of indexing – letting down a generation of students.
“Now we have the Chancellor’s repayment threshold freeze due in 2027, leaving graduates not only at the mercy of fiscal drag on income tax, but on student loans too. It’s double-drag and it shouldn’t happen.”
He argued in 2016 that the terms of the existing student loan contracts should not be negatively changed and should be regulated by the Financial Conduct Authority (FCA).
Lewis urged Health Secretary Wes Streeting to raise the case with Cabinet after he supported campaigning on the issue as a backbench opposition MP.
Kate Ogden, an economist at the IFS, said: “The most recent freeze in the repayment threshold for Plan 2 student loans is not the first time that government has changed the terms of these loans.”
Oliver Gardner, of the Rethink Repayment campaign, added: “For a lot of young people in the UK, student loans feel like something that they were mis-sold… The frustration young people have isn’t about repaying what we initially borrowed – it’s about the fact that the government is constantly changing the goal posts.”
Labour MP Luke Charters, who formerly worked at the FCA specialising in fraud, said: “If a commercial lender had designed and operated a scheme like Plan 2, it would almost certainly have attracted regulatory scrutiny.”
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The FCA does not have the power to regulate student loans in the same way that it would do a commercial bank and such loans fall outside its regulatory remit.
A Department for Education spokesperson said: “These loans were designed and implemented by the previous government. This Government is reforming the student finance system to deliver a fairer deal for students in the future, including by re-introducing targeted maintenance grants.
“We’re making the tough but fair decisions needed to protect taxpayers and students. Lower-earning graduates will continue to be protected, with any outstanding loan and interest written off at the end of the loan term.”
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