A new model of student loan repayments would cost the taxpayer close to zero but be more “manageable” for graduates, according to a new paper from a think tank and the National Union of Students (NUS).
The so-called “stepped” repayment system – where graduates pay differing proportions of their income depending on their salary – would be a good replacement for the current plan 2 loan system, figures from the NUS and Higher Education Policy Institute suggest.
Multiple alternatives to the current system have been suggested after the topic of how much interest graduates must pay on their loans became a recent talking point.
This one would be “cost-neutral” for the Treasury, experts say. Here is how a stepped repayment plan would work and which students would pay less or more if it were put into place.
How would repayments work?
Under the plan 2 loan system – which most graduates who started university between 2012 and 2022 are on – borrowers pay a flat 9 per cent of their earnings over £29,385 towards their loans.
The new proposal suggests graduates could start repaying at a much lower level than they have to currently – £12,570 – but only pay 3 per cent of their earnings until they earn £27,570.
They would then pay increasing increments of their salary – 5 per cent between £27,571 and £42,570 and 7 per cent between £42,571 and £57,570 towards their loans.
They would then pay a lower 3 per cent rate on all earnings above £57,571.
The table below shows how it would work at different salary levels.
What would it mean for the interest?
At the moment, graduates pay interest at different rates depending on their earnings.
Graduates earning £29,385 or less pay the RPI level of inflation, and then interest increases on a sliding scale, so those earning £52,885 or more pay RPI plus an extra 3 per cent.
The interest in the new proposals would be higher for those on lower salaries.
Anyone earning below £12,570 would pay RPI and then the sliding scale would run to £42,570 at which point people would pay RPI plus an extra 3 per cent.
What would it mean overall?
For most people, the proposed system would see monthly repayments at a lower level than before.
However, the lowest-earning graduates would pay more under the proposed system.
The highest earning graduates would pay back more overall, because even though their monthly repayments would be lower, they would repay their loans for longer due to the lower repayments, and higher interest starting at a lower salary level.
Rose Stephenson, director of policy and strategy at the Higher Education Policy Institute, said: “This report highlights a fundamental truth at the heart of the student finance system: there is no perfect solution, only a set of trade-offs.
The cost of higher education is ultimately shared between taxpayers and graduates, with the added complication of how repayments should be distributed across graduates who earn different amounts.
Getting this balance right is both difficult and essential - particularly in a time of constrained economic growth.”
Dr Gavan Conlon, partner at London Economics, said the proposed stepped system was “more progressive” than the old system.
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