Tuition fees: Early repayment penalty threat withdrawn

Annie Lund reports on the good news that a government consultation has rejected the proposal to penalise the early repayment of tuition fees, in line with objections raised by IF

There was a bit of intergenerational good news last month: after a consultation process, the Department for Business, Innovation and Skills (BIS) decided to drop its idea of imposing financial penalties on graduates who repay their student loans early.

The proposal put forward last year contained two main ideas regarding early repayment penalties. The first focused on so-called high payers: those wishing to make large, lump sum early repayments, with a suggested 5% levy on repayments over £3000. The second focused on high earners: those on salaries over a certain point, say £41,000, with a suggested levy on all of their early repayments.

With the new student loans system charging interest on students’ debt according to their salary, the proposal’s aim was to creative a ‟progressive” repayments system in which those able to repay loans early did not avoid making a full contribution to the system in the repayment process by ridding themselves of debt before their salaries – and in turn their repayments – increased in size.

IF’s objections

IF’s response was founded, unsurprisingly, on purely intergenerational grounds. It was guided primarily by its approach to student finance and concern over the impact of large debts held by the younger generation. With future graduates having to pay more for their tertiary education than current and past ones, over a longer period of time and with higher interest rates, the financial burden is likely to hinder young people’s progress towards the milestones of adult life such as marriage and the purchase of a house. It therefore follows that the financial burden of university education after graduation should be as small as possible and the quicker the repayment, the smaller the burden. Early repayment should therefore not incur any penalties.

A warning, however: early repayment will not necessarily be advantageous for all graduates, since – under the new system – graduates on lower incomes will end up never repaying their entire debt before it is written off thirty years after leaving university. Early repayment by those who fall into this category will be money down the drain. Unless, of course, a future government rescinds the thirty-year write-off deal – which, under current arrangements, it will be perfectly entitled to do.

Posted on: 4 April, 2012

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