So, where are we right now with student loans and what advice might we offer to students and families?
If the UK is to start to climb the productivity league tables, then it needs to get its education piece positioned correctly. An increasing area for concern from our private clients is the challenges facing their children and grandchildren progressing through the education system.
The decisions are not easy. In recent decades, apprenticeships and vocational courses at college were seen as poor relations to a university degree. So high was the demand for places that universities, together with state incentives, filled their financial boots by broadening the amount and breadth of courses on offer. Although many employers prefer hiring people with a diverse set of educational backgrounds, it was also sometimes the case that students went to university because that was the thing to do, coming out with a degree that did not really shift their job prospects, albeit still left them debt-ladened. Little wonder that further down the line, with the state having withdrawn much of its own funding, that universities are now seeing a reduction in the number of applications. Add into this mix the uncertainty around future career opportunities, courtesy of recent government policy change (increasing the minimum wage means it is more expensive to employ young people) and the advances of artificial intelligence, then it’s understandable why universities are now struggling. In turn, many are now under financial pressure, effectively having been cut loose by the state and fighting some gradual societal and policy-induced trends.
So, where are we right now with student loans and what advice might we offer to students and families?
Student loan repayments are income contingent. Repayments begin when income rises above a certain threshold; currently £28,470 for those with Plan 2 loans who started studying in England and Wales between 2012 and 2023. You repay a fixed 9 per cent of your income above this level; earn less, and you repay nothing (though interest is still applied to the balance). If you haven’t cleared your loan after 30 years, it is wiped out.
Since the recent Budget, student loans have leapt up the political agenda. From April 2027, the Plan 2 repayment threshold will be frozen for three years. This means a double dose of fiscal drag for graduates. As their pay increases, more of it will be taxed at higher rates. At the same time, income tax thresholds are frozen for the foreseeable, a double whammy of higher tax as people earn more. Really, the governments hiking National Minimum wage to just under £25,000 per annum makes further mockery of how loan repayments are positioned.
Some of the highest earners who actually stand a chance of clearing their loan within 30 years are debating whether they should risk repaying it early.
Aidan Morris, a 27-year-old economics graduate from Loughborough, has just crossed the £50,000 higher-rate tax threshold. For every pound he earns above this level, his effective tax rate is 51% (40% income tax, 2% national insurance and 9% student loan repayment), meaning he keeps 49 pence for every pound he earns thereafter. He works for a blue-chip company, but has requested to reduce his working hours, calculating that he’d only lose £80 a week from his net pay by not working on Fridays.
Despite Aidan enjoying his work he finds the wage projection “highly demotivating”. He could push for promotion, but like most graduates with Plan 2 loans, he’s worked out it is going to take an age to repay the full amount, if he manages it at all. Earning £52k he will pay back £2,118 per annum, but the interest being added to his loan balance every year is actually greater. He is charged at RPI plus 3 per cent for being a higher earner (currently 6.2%), which equates to £3,286 per annum. So despite being taxed a further 9%, he is actually not even able to reduce his debt. At this stage he expects to be stuck paying 9 per cent extra income tax for the next 30 years — a reality that more graduates are waking up to.
This level of taxation certainly seems to resonate with claims that this is an obvious “tax on ambition”. Easy to see why our best talent might not view Blighty as the best place to drive productivity.
After the £50,000 pinch point, there’s another marginal tax rate squeeze for Aidan at £60,000 (where child benefit starts to be tapered away) and £100,000 where the personal allowance and free childcare funding are completely lost. Yes, these sky-high marginal rates impact all higher earners, but those repaying an extra 9 per cent on top — or 15 per cent if they have taken out a postgraduate loan — simply feel crushed.
Someone with children who is moving towards earning more than £100k per annum but still has a student loan is faced with an effective rate of tax of more than 100%. Yes, you read that right… as they lose their personal allowance, and childcare funding, and still continue to pay their student loan, they end up with less money than if they had just earnt £99,999. What is the point in being successful then, many will think.
There is no doubt in our view that students who are from families who have planned ahead for university funding, and those that are in a position to self-fund should do so. Some might argue that this is a return to an elitist university system (call it what you will), the reality is that students can be hundreds of pounds better off a month than colleagues on the same wage who had to borrow.
Some of the highest earners who actually stand a chance of clearing their loan within 30 years are debating whether they should risk repaying it early. Some have borrowed money from family; others are considering using savings. Obviously, crystallising an income-contingent debt they might never have to repay is a risky move. But trust in the system has been eroded by past and future changes to repayment terms, and if they expect to be successful and their earnings to increase, paying it off early will be of benefit in the long run.
We’ve had plenty of budget u-turns but a reversal of next April’s student loan repayment threshold freeze would be a welcome sign that somebody is actually listening.
Even some financial professionals argue that the Financial Conduct Authority’s Consumer Duty principles should apply to student loans, noting the vulnerability of teens who sign on the dotted line, and the weak bargaining position that those who have taken out loans now find themselves in. Watch this space…
The budget think tank, Rethink Repayment has gained much traction since the Budget, arguing that the 9 per cent repayment rate should be lowered to 5 per cent, its 26-year-old founder Oliver Gardner urges his supporters to lobby their MPs, noting how many of them are also repaying student loans. “The economic injustice we are facing is the issue that will politically re-energise my generation,” he predicts.
Will politicians take heed of this widening intergenerational divide? We’ve had plenty of budget u-turns but a reversal of next April’s student loan repayment threshold freeze would be a welcome sign that somebody is actually listening.
In the meantime, what can we do? Better education for those that are planning to go to university, about the position they will be in after, allowing them to properly assess the pros and cons. And for those parents and grandparents who are more fortunate financially and can help support their children or grandchildren, build a savings strategy into your planning objectives. For someone born today, saving £100 per month into a Junior ISA and investing that at 6% growth for 18 years would translate into more than £30k inflation-adjusted by the age of 18. That is half a university course after all, and would significantly reduce the interest due on the eventual loan and the ability/speed at which any future loan could be repaid.
If you would like to discuss your child or grandchild’s further education costs, please speak with your advisor. With rising Inheritance tax on estates, we are seeing increases in annual gifting to both plan and pay for family education. As with many aspects of planning our advice to clients has come full circle given changes in legislation. This is why it is invaluable to review your plans and objectives with a view to using capital and income as effectively as possible.
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