What is the student loan repayment threshold? Salary graduates start paying back loans and new plans explained

All eyes are on Rishi Sunak’s Autumn Budget 2021 as an independent panel recommends lowering annual salary threshold for graduates to repay student loans and extending repayment period

Ministers are considering cutting the threshold at which graduates begin to repay student loans in the Autumn Budget 2021.

The proposal being mulled over in government would raise sufficient funds to help to plug the widening whole in the current student finance system.

Though mooted plans have been widely opposed by unions who have said it would be a "regressive" and a "substantial burden" on young people.

Here’s all you need to know about the current student loan repayment threshold, proposed changes to when students start paying back and why...

What is the student loan repayment threshold?

The current threshold English graduates, who started a course in or after September 2012, begin paying back their loans when they earn £27,295 or more a year.

Repayments rates vary depending on salary, with the highest-earning graduates repaying the most on their student loans and lower-earning graduates making smaller contributions.

Loans are repaid to the government under the national student loan scheme.

Attempts to raise more money “will shift costs onto borrowers with middling earnings but largely spare those with the highest earnings”, according to an Institute for Fiscal Studies (IFS) report.

What are the student loan repayment threshold proposals?

It is proposed the annual salary threshold at which graduates begin to repay student loans is lowered to £23,000, while the time allocated to pay loans off should be extended to 40 years.

Ministers are considering the two proposals recommended in a review of the higher education system - an independent panel led by Philip Augar - which was published in May 2019.

The Augar report also includes cutting tuition fees to £7,500 - a recommendation that prompted the government in January to freeze tuition fees at £9,250 for the next academic year.

Why are ministers considering lowering the student loan repayment threshold?

Ministers are looking at ways to save around £3 billion of public spending each year, under the new proposals being mooted.

But the IFS says extending the loan term for student loans will hit graduates with middling earnings hardest, as most of the highest-earning borrowers will repay their full loans in fewer than 30 years and the majority of graduates with the lowest lifetime earnings will not earn above the repayment threshold.

Lowering the repayment threshold for student loans would also affect graduates with average earnings the most, the report suggests.

It warned: “Unless the thresholds for loan interest rates were changed at the same time, the highest-earning borrowers would even end up paying less, as they would pay off their loans more quickly and thus accumulate less interest.”

The analysis adds that lower interest rates would also be a “big giveaway to the highest-earning borrower” and would make the system “less progressive”.

What else has been said about the new student loan proposals?

Ben Waltmann, senior research economist at the IFS, said: “With a series of tweaks to the student loans system, successive chancellors have painted themselves into a corner.

“The system is expensive, but there is essentially no way to raise more money from it without hitting borrowers with average earnings more than the highest-earning ones.

“If he wants to raise more from the highest earners, the chancellor will need to use the tax system.”

While Money Saving Expert founder Martin Lewis warned against retrospective charges.

He said: "If the government decides to do this, it should only be done overtly and up front so prospective students, and their parents, can look at the real cost for them of going to university and decide if it’s worth it.”

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