Latest news with #Plan2
Telegraph
14-05-2025
- Business
- Telegraph
The British graduates with the highest student debt
The 10 graduates with the biggest student debt in Britain owe a collective £2.7m, figures show. The single most indebted student owes the Government nearly £300,000 for courses started in January 2012. All 10 were more than £250,000 in debt for courses beginning between 2010 and 2015, data released to The Telegraph by the Student Loans Company (SLC) under Freedom of Information rules revealed. Experts said that the graduates were likely to have done long courses or multiple degrees, as well as having faced high interest rates. Student loans can be taken out to cover tuition fees – which are set to rise to £9,535 in September – and living costs. The amount that can be borrowed depends on the financial situation of the student in question, and the loans are not repaid until graduates earn over a certain threshold. The average graduate in England last year was £48,470 in debt when they started repaying their loan. Approximately £20bn a year is loaned to 1.5 million students, according to a briefing by the House of Commons. The value of outstanding loans is forecast to hit £500bn by the late 2040s, government predictions show. This is in part because of the interest rate structure on higher earners. Those who started their degrees in 2012 have so-called 'Plan 2' loans, which sees them charged the retail price index (RPI) plus up to three percentage points, and start making repayments once their salaries exceed £28,740. For anybody earning between £28,470 and £51,245, the interest rate increases gradually from 4.3pc to 7.3pc – the higher the salary, the higher the interest rate. Anybody earning over £51,245 is charged the maximum interest rate of 7.3pc. Sarah Coles, of investment platform Hargreaves Lansdown, said: 'It's really unusual to have an outstanding loan balance of £250,000 or more. It will usually mean someone has studied a number of courses in order to rack up the debts. It's also likely to include plenty of interest.' She said that the changes made to student loans in 2023 would mean students pay back more on lower salaries. Those on Plan 5 loans begin repayments at £25,000, and will not have their debt wiped for 40 years. Ms Coles said: 'We have moved from a system where only 27pc of people repaid in full, to one where 65pc of people do. And because they carry it for the longest, upper middle earners will repay the most.' Tom Allingham, of campaign group Save the Student, said: 'The amounts exposed by this data are eye-watering.' Mr Allingham said that even though a graduate could owe as much as £300,000, the repayment terms on student loans would not change. He said: 'The size of your debt has absolutely no impact on the amount you repay each month. Your debt could be £300,000 or £300, but you'd still only repay the same 9pc of your salary over the threshold.' The campaigner said that because of the lower interest rates on the new Plan 5 loans, it was unlikely that future graduates would see debts as large as current graduates. Those who began their courses from 2023 will pay only RPI on their loans. He said: 'Future graduates will see their loan balance grow more slowly than those in the past, and never have to repay more than they borrowed in real terms.' One way that graduates are avoiding repaying the SLC is by moving abroad. Figures show the body is trying to trace 112,000 'runaway' graduates who live overseas and are not actively repaying their loans, including 73,000 UK natives. They have a total outstanding loan balance of £2bn – or £27,000 each. Tuition fees were introduced by Tony Blair in the 1990s, and initially sat at just £1,000 a year and then £3,000 from 2006. The coalition government controversially tripled fees to £9,000, despite a Liberal Democrat manifesto pledge to do away with the charges. The fees then rose to £9,250 in 2017, and will increase to £9,535 later this year, an increase of 3.1pc. A Department for Education spokesman said: 'These balances are not typical of the vast majority of graduates. 'It is vital that students can be confident the significant investment they make in higher education delivers real value for money and that universities provide teaching and an experience they deserve, to help students pursue a rewarding career. 'It's also important we have a sustainable student finance system that works for both students and taxpayers.'
Telegraph
25-04-2025
- Business
- Telegraph
The punitive hidden tax killing young people's ambition
When Tony Blair laid out his goal of sending half of the British population to university in 1999, tuition fees were just £1,000 a year. Now, 25 years later, costs have ballooned, and Britain is reckoning with the disastrous consequences of his arbitrary target. Millions of young people are now trapped in a punitive student loan repayment system that functions as an additional, hidden tax on anybody earning a decent wage. As your pay increases, so does the proportion of it you pay on the loan. This is helping to punish ambition in young graduates. What's the point of working hard to get a pay rise when so much of it will be swallowed up by interest on your student debt? When a pay rise leads to soaring repayments Under the current system, existing graduates with Plan 2 student loans – those who began university in September 2012 or later – repay 9pc of everything they earn above £28,470 a year. This effectively makes it a graduate contribution tax. As those graduates earn more, the proportion of their salary that they lose towards student loan contributions grows. For example, a graduate earning an average UK salary of £40,000 a year repays £95 a month or £1,143 a year towards their loan, just 2.8pc of their full earnings. But somebody earning £70,000 a year would repay £320 a month, or 5.4pc of their pre-tax salary. This has a tangible effect on ambitious graduates, for whom the prospect of a pay rise becomes even less worthwhile with student loan repayments thrown into the mix. Say, for example, that a graduate earning £70,000 is offered a new role paying 20pc more. Thanks to the 40pc rate of tax that kicks in on earnings above £52,000 and the growing proportion of their income eaten up by their student loan, their take-home pay will only increase by 14pc. This is because their monthly student loan contributions will rise from £311 to £416 overnight, a 34pc increase – almost twice that of the pay rise itself. This is hardly a strong incentive to take on more work. For higher earners, the numbers are starker. A graduate with a Plan 2 student loan on a £100,000 salary would need a 23pc pay rise in order to receive the same take-home pay as somebody on the same salary with no student debt. 'The tax system is punishing for pretty much all taxpayers, but recent graduates definitely bear the brunt of the very worst parts of it, given the way student loan repayments only add to already cripplingly high marginal tax rates,' says John O'Connell, of the TaxPayers' Alliance. This problem will only become worse in the future – anybody that started university in 2022 or later will make student loan repayments once they earn £25,000 or more. With the annual full-time minimum wage around £23,800, it won't be long before all working graduates are dragged into making student loan repayments. This also means that future graduates earning above the existing threshold will pay an additional £312 a month in repayments. 'We already have a progressive tax system based on the more you earn the more you pay in tax, so the 'graduate tax' is a form of double taxation on incomes which anyone over the age of 57 did not have to pay,' says Liz Emerson, of the Intergenerational Foundation charity. Higher interest rates for larger salaries The real kicker is that even if that graduate on £70,000 does take the pay rise, which would see them earning a salary of £84,000, they would barely be clearing the annual interest accruing on their student loan, let alone the underlying balance itself. The interest rate on Plan 2 student loans is set at the retail price index (RPI) inflation rate, plus up to three percentage points. Anybody earning below the repayment threshold is charged the RPI-linked interest rate of 4.3pc. For anybody earning between £28,470 and £51,245, the interest rate increases gradually from 4.3pc to 7.3pc – the higher the salary, the higher the interest rate. Anybody earning over £51,245 is charged the maximum interest rate of 7.3pc. O'Connell adds: 'The simple reality is that someone has to pay for these degrees, and it's absolutely right it is the graduates that benefit from it. But having differing levels of interest based on income is completely indefensible.' Not only does this punish ambition, it lies in stark contrast to traditional lending methods. Generally, the more you earn, the lower the interest rate you qualify for, because lenders view you as less of a risk. But simply because it can, the Student Loan Company slaps an interest rate on student debt that is far higher than any you would see on a residential mortgage loan. For example, HSBC charges average annual interest in the region of 4.1pc on its two-year fixed rate home loans. 'I'm paying a higher marginal tax rate than my boss who earns 10 times more than me' Paul*, 25, earns six figures as an investment banker. But he feels that the punitive student loan system means it is not worthwhile for him to work harder and pursue the higher bonuses on offer at his firm. 'The combination of effectively an extra 9pc tax and 7.3pc interest on £50,000 of deb t feels heavily penalising, and creates a real divide between those who have and those who don't have a student loan,' says Paul, who made student loan repayments of £13,000 last year. 'My colleagues who don't have a student loan receive an extra £600 a month. It feels crazy that I'm paying a higher marginal tax rate than my boss who earns ten times as much as me. 'I definitely have not worked as hard to try and achieve a top bucket bonus; the incremental gain between this and a middle bucket bonus after my marginal tax rate is just not worth it.' The SLC has ditched the punitive three-percentage-point interest rate premium for those who began university in 2022 or later, though graduates will instead be forced to contend with the lower repayment threshold and loans that will be written off after 40 years rather than 30 years, as they are for current graduates. But for anybody who began university between 2012 and 2022, they will remain trapped in the current interest rate system, which adds three percentage points. 'The allure of dodgy degrees' Blair's target of getting half of young people into university meant that instead of entering the workforce, they are encouraged to pick a degree – any degree – and worry about the consequences later. This gave rise to a culture where so many people are university educated that having a degree becomes essential for muscling into the job market, fuelling the cycle of pushing even more young people into university, and into decades of debt. The majority of employers (57pc) still mainly look for degrees or post-graduate qualifications when recruiting staff, according to 2022 research from The Chartered Institute of Personnel and Development (CIPD). But that doesn't mean they will be good hires – it also found that 33pc of employers think candidates from higher education are poorly prepared for the workplace. And according to YouGov, 46pc of employed, degree-educated Britons said that their university education was not applicable to their job. Lizzie Crowley, of the CIPD, says: 'Employers need to stop thinking that generic university degrees are always the best indicator of a person's potential at work. 'They think they're getting 'off the shelf' capability rather than assessing the specific skills needed for roles, then wondering why they have ongoing skills gaps.' With apprentices in subjects such as engineering and construction earning higher salaries than their university-educated peers – and avoiding tens of thousands of pounds of debt to boot – an adjustment in the emphasis placed on the importance of university education could go some way in solving the problem, argues O'Connell. 'There needs to be a wider societal rethink about what society, and young people, should expect from university,' he says. 'Along with reforms to interest rates and the lifting of tax thresholds, ministers should consider restricting certain courses or universities from being eligible for student loans, and should make universities liable for unpaid student loans to ensure young people aren't being tricked by the allure of dodgy degrees.' A spokesman for the Tony Blair institute said: 'The most successful countries in the world have a high percentage of young people going to university. But it is a choice. No one is forced to do so. The reason they choose to do so is because graduates earn more than non graduates. 'The student loan scheme the Tony Blair Government introduced was at a much lower rate of interest. And by introducing student loans Britain's university sector was saved from financial crisis. That sector remains absolutely critical to Britain's future. There should be good non-university options open to young people as well.' The Student Loans Company was contacted for comment.
Telegraph
19-04-2025
- Business
- Telegraph
Stop giving student loans to those who will never repay them
You might imagine that student loans – now a familiar feature of young people's lives – are actually loans. It's true that the Government will write them off if not repaid after 30 or 40 years, but surely the 2010 settlement was designed to fund higher education by loans, not grants? Maybe that was the intention, but it's not what has happened... If you started at university on or after September 2012 but before September 2023, you would have been offered a 'Plan 2' student loan. Its key characteristics are that you repay the loan at a rate of 9pc of your future annual pay over a threshold (around £25,000, but variable), and interest accrues on the balance of your debt at the Retail Price Index (RPI) + 3pc. Borrowers don't pay interest as it accrues – they just pay 9pc of their pay over the threshold, and the interest rolls up and compounds in the loan. Any outstanding balance left on the 30th anniversary of your leaving university is written-off by the Government without any effect on the borrower's finances or credit rating. Early on in the life of Plan 2 loans, the Government realised that a significant percentage of loans would never be paid off because the interest rate was too high to allow modestly paid graduates' repayments to cover the compounding interest. The relatively high salary threshold for starting to repay (double the tax threshold), and the reality that many modern graduates do not go into high-paying careers meant this effect was exaggerated. It's an odd system, but this is how it had been designed (by Messrs Cameron and Clegg in 2010). Once the Government realised that a significant proportion of the loans would not be repaid, it became clear that the Government was, in effect, paying a proportion of undergraduate students' fees and maintenance from the public purse. So, under pressure from the Office for Budget Responsibility (OBR) and the National Audit Office, the Government statisticians at the Office of National Statistics (ONS) recommended that only a proportion of student loans be categorised as 'loans', and treated as assets on the Government's balance sheet; while the remaining portion, even though formally Plan 2 loans, should be accounted for as public expenditure on higher education in the year in which the student took out the loan. This was called the partition principle: splitting each cohort into loans on the one hand, and grants to students on the other. When this new accounting treatment was adopted in September 2019, it increased public spending (through accounting some of the loans as grants), and hence increased public sector deficit and net debt, even though nothing had changed in the cash changing hands and what students thought they owed. The impact on public debt was huge – the ONS reported in 2020 that the impact of re-calculating the end-March 2019 Public Sector Net Financial Liabilities (PSNFL – the Chancellor's preferred new measure of public sector debt) was a debt increase of £55.9bn. In their 2020 calculation of the 2018-2019 financial year, what proportion of student loans were the Government statisticians expecting to be written off, and hence were treated as current expenditure rather than a loan? The answer is astonishingly high – 52pc. Government statisticians had studied loan repayment rates and overall graduate participation in the UK labour market for the previous 20 years. They concluded not just that 52pc of loans would not be fully repaid in 30 years' time, but that writing off 52pc of the loans at the point they are loaned – which includes writing off all the future interest that would have been accrued, and also all the repayments that these loans will still attract – means that about half of all the money supposedly loaned is in fact going to turn out to be a grant, not a loan. But here's an oddity. Students themselves are certainly not being told that half of all student loans are being written off as they are granted. So all students are still being discouraged by the 9pc 'tax' rate that will be applied to their earnings for 30 years; and indeed no loans are actually being cancelled – everyone still has to pay. Which brings us to another anomaly. The Student Loans Company (SLC) isn't concerned with how the Government is treating loans at the national fiscal level. It is concerned with accurately recording the student loans that are outstanding. So the SLC reports that the outstanding loan balance at March 31 2024 is £236bn. By contrast, the Government reports that the assets it deems to be student loans are valued at only £158bn. This is not the end of the story. From September 2023, new student loans became Plan 5. This had two very significant differences from Plan 2. Firstly, the Plan 5 interest rate is just RPI, not RPI + 3pc p.a. This enormously reduces (by about half) the speed of accumulation of interest, and hence debt, run up by students. Secondly, Plan 5 debt is written off 40 years after graduation, not 30 years. With the lower interest rate, and the longer period for repayment, the forecast of un-repaid debt at maturity falls dramatically. This has a large knock-on effect on the Government's fiscal position, increasing its student loan asset accumulation, and reducing current public expenditure (the c. 50pc write-off) that it was booking to current account. The effects of what seems like somewhat esoteric changes are in fact large in public spending terms: the Institute for Fiscal Studies (IFS) forecasts that the proportion of loans treated as current expenditure will fall from 61pc in 2021-22 (under Plan 2) to 34pc in 2026-27. Since student loans advanced in 2023-24 totalled £19.9bn, that is an apparent fall of 27pc (61pc-34pc), or just over £5bn. All at the stroke of a pen. The Government itself can't agree on the valuations to place on written-off debt, because the calculation is sensitive to interest rates and other assumptions, and they can't agree on the appropriate interest rate. So the Department of Education and the Office National Statistics work with differing numbers in the government accounts. Hence you may have noticed that both 52pc and 61pc were presented above as the scale of the loan write-offs. Different years; different methodology. Instead of this muddle, and the strong disincentive that the 9pc tax rate has on the graduate workforce, wouldn't it be better to give grants to those that need them, and smaller volumes of loans, with no write-off, to those who would be able to afford them? And perhaps a smaller proportion of the cohort going to university?
Telegraph
15-04-2025
- Business
- Telegraph
‘I have a £10k house deposit. Should I pay off my £45k student loan first?'
Receive personalised tips on how to improve your financial situation, for free. Here's how to apply or fill in the form below. Imogen Cromack faces a dilemma typical for her generation. The 26-year-old, who works in communications in London, would like to buy a house with her partner before she turns 30. She has around £10,000 saved in cash, which she has put away in a two-year fixed-rate savings account, where it will earn decent guaranteed returns. However, she's also saddled with £45,000 student loan debt, having completed a three-year business course at the University of the West of England. Repayments are taken from her salary each month, at 9pc on anything earned over the Plan 2 threshold of £28,470. Thanks to the interest charged, for many graduates, the prospect of never paying off a student loan is all too real. She asks: 'My main question, really, is: should I look at paying off my student loan faster, or should I save instead for a deposit and other house buying expenses?' Ms Cromack spends less than £2,000 a year on holidays, choosing to go on one 'big' holiday a year, usually lasting a week. She pays £1,000 a month in rent and bills, and prioritises a £80-a-month gym membership, which she gets heavily discounted through work. She says: 'I don't frequently go out for big expensive dinners. I probably spend more on just seeing my friends and doing some activities and stuff like that. I am more of a homebody personally.' As she looks towards the next five years, Cromack says her priority is to be financially stable, adding: 'I would like to be prepped to be able to stand on my own two feet.' Lucie Spencer, financial planning partner at Evelyn Partners, said: Ms Cromack lives a relatively conservative lifestyle in terms of expenditure, so it is sensible to consider the implications of paying off her student loan early versus saving to buy her first home. What she must remember is that student loan repayments can affect the size of the mortgage she can secure, though it won't have as heavy an impact as other personal debts. While student loans do not appear on a credit file, and therefore won't affect her credit rating, they can impact her affordability level, as the student loan repayment counts as a regular outgoing in the same way her gym membership does. However, in contrast with other debts, it is the amount which you repay which gets factored into this assessment rather than the total outstanding debt. In essence, the student loan system works more like a graduate tax on earnings than a conventional loan. Like income tax, the more you earn the more you pay, so it is the higher earners that will end up paying the most. But, while Ms Cromack qualifies for repayments and may want to consider repaying her debt earlier, the savings she has now won't be enough to clear her outstanding liabilities, and she will continue to repay the same amount each month. If she chooses to take time out from her career at any point, perhaps to raise a family or take a sabbatical, her repayments will stop for that period. The current interest rate on a Plan 2 student loan is relatively high at 7.3pc, as of September 2024, but this typically resets every September and is linked back to the RPI of the previous March, so it should lower later this year. With that in mind, it may make more sense for Ms Cromack to prioritise short-term financial priorities such as raising a deposit to buy a home rather than clearing her student debt. If she wants to focus on building up a deposit, then she could consider a lifetime Isa (Lisa), where she will attract not only interest on her savings, but also an additional 25pc top-up from the Government of up to £1,000 on the maximum annual contribution of £4,000. Savings rates are in retreat mode, and it is important to keep savings as tax efficient as possible – something a Lisa can offer. A Lisa pot can be invested in stocks and shares or held in cash, but if Ms Cromack plans to purchase a home within the next five years, it may be better to stick with a cash option to ensure she is not impacted by any stock market fluctuations. Darius McDermott, managing director at Chelsea Financial Services, said: It's great to see someone in their 20s balancing both ambition and financial discipline. The desire to save for a home while also thinking about clearing debt is admirable, but it's important to be realistic and strategic with priorities. With £10,000 already saved in a two-year fixed-rate account, the foundation for a house deposit is in place. However, the student loan repayment at 9pc is a significant cost. Put simply, if the interest on the loan is higher than the return on your savings, it often makes financial sense to prioritise debt repayment, especially with high inflation eroding savings in real terms. That said, student loans are unlike other forms of debt – repayment is tied to income and is eventually written off. So rather than rushing to pay it off entirely, a balanced approach might be wiser, continuing to save steadily, while ensuring you're not accruing more expensive interest than necessary. As Ms Cromack's income grows, gradually increasing contributions to savings, and eventually exploring investment options, could help build momentum towards her long-term goals. She's already made a strong start with her fixed-rate savings.
