What is changing with student finance?
Last week it was announced that we’ll soon be seeing the biggest changes to student finance since the last round of major changes in 2012. Here I will summarise them (as concisely as I can) for school and college colleagues.
As quoted by the Institute for Fiscal Studies, these changes will transform the student loans system. While under the current system, only around a quarter can expect to repay their loans in full, around 70% can expect to repay under the new system.
So this is a big deal. Finance has a huge impact on university participation - student fees and finance is the biggest barrier to university for students - pretty much everywhere you look. Including in our own National Review of University Guidance. So it is essential we have fit for purpose communications to schools and colleges about the changes this time around. I’ll be writing to the Government to put that case forward.
What are the top 5 things schools and colleges need to know about the student finance changes?
1/ This will not impact students starting university this year (in 2022)
No major changes apply for current Year 13’s hoping to go to university this year. But it will probably make a gap year a lot less attractive for many. Current Year 12’s applying to university next year will be the first-year group subject to the new system.
2/ Students will (probably) be repaying more than before, and for longer.
Loans are currently written off after 30 years if a graduate has not cleared their student loan balance. This is changing to a 40 year repayment term from 2023. In addition, students currently pay back student loans at a rate of 9% of what they earn over the student loan threshold of £27,295 – this is dropping to £25,000 and this repayment threshold figure will be frozen until 2026.
To put this into context, a student graduating now and earning £28,000 will repay around £5 per month, and that’ll stop after 30 years if they have not cleared their student loan balance within that time period. Under the new system, it’ll be 40 years before the balance wipes (+10 years) and by my calculations, repayments will increase to around £22 per month (+£17). I will explain the "probably" comment below.
3/ Interest rates are falling for students on the new system
For the new 2023 onwards system, the interest rate on student loans will be reduced to the rate of inflation in the Retail Prices Index (RPI). Rather than up to RPI + 3% for students and graduates at present. So some positive news. But it is forecast that many students on the existing system won’t pay their interest anyway, as they won’t clear the full student loan balance let alone their interest. So make of that one what you will.
But one message actually worth considering with this in mind, is that for some students the new system will mean they pay less in total - as their interest is less and because they are repaying more, they'll clear the balance quicker. That won't apply to most - but will apply to some.
4/ No retrospective changes
The only real change I can see here is a minimal one in the grand scheme of things for graduates and students at university now (and 2022 starters before this comes in next year). The student loan repayment threshold (currently £27,295) has been increasing each year but will now be frozen until 2025. But frozen at £27,295 is of course better than frozen at £25,000 under the new system.
5/ Student finance and university has many benefits - we shouldn't lose sight of that
Changes on the face of it are not good for 2023 starters onwards compared to the existing system which 2022 starters will benefit from. But students still have finance at the point of entry for their tuition fees and towards maintenance costs. And university for many is a life changing experience - combined with the statistics indicating university graduates earn significantly more than those not going to university.
And if students don’t go on to earn salaries to warrant their university participation, the loan is wiped after 40 years and they’ll need to earn £25,000 before any repayments apply. So student loans, despite being not as attractive as they perhaps were, are still likely to be the best loan terms someone will ever be subject to.