The impact of student loan increases is a concerning new financial landscape for graduates, writes Sam Patterson, Head of Delivery at Equilibrium Financial Planning.
Last year, the UK government announced that for the first time since 2017, university tuition fees would rise for the 2023/24 academic year. While this was already disappointing news for students across the UK, there was also a hidden element to the fee increase that many may not have considered.
In the 2022/23 tax year, over one million university leavers overpaid their student loans, according to a Freedom of Information (FOI) request initiated by Money Saving Expert. This staggering figure highlights the complexity of the often-misunderstood student loan system in the UK.
The biggest change in a decade
Many people are unaware that student finance underwent its most significant change in a decade from August 2023. In a shift that has created far-reaching implications for graduates’ financial futures, the maximum term for repayment was extended from 30 to 40 years.
Why it slipped under the radar
This substantial change managed to slip under the radar for a couple of reasons. Firstly, the student loan isn’t actually treated as a loan in the traditional sense. The amount you repay isn’t based on the outstanding loan, but instead on the amount you earn. For all intents and purposes, it’s more akin to a student tax. Secondly, the terms have consistently been amended in recent years, meaning that this change may have been missed amidst the constant flux of student finance regulations.
The most common plans
According to gov.uk, full-time undergraduates in higher education are expected to borrow on average £42,800 over three years. Previously, only 27% of borrowers for the 2022/23 cohort were expected to repay their loan in full. However, with the new changes – including the extended repayment term and the lowering of the salary threshold to £25,000 – this is expected to increase dramatically to 65% for the 2023/24 cohort.
The impact on working life
To illustrate the impact of these changes, let’s consider someone earning a salary of £30,000. This level of income is subject to a basic rate income tax of 20% and national insurance contributions of 8% on earnings above £12,570. In addition, student loan repayments are also owed on earnings over £25,000. In this instance, the marginal rate of tax would be a staggering 37% on earnings between £25,000 and £30,000.
For higher earners, the situation becomes even more striking. An individual earning £65,000 would face a marginal tax rate of 51% (40% income tax + 9% student loan + 2% national insurance under the new rules). This is without accounting for pension contributions or the impact of lost benefits, such as the child benefit, which is reduced on a sliding scale for anyone earning over £60,000.
A shift in financial planning advice
Prior to August 2023, if asked whether it was worth paying university fees upfront, the common answer was “no”. With only 27% of students expected to fully repay their loan and the outstanding balance due to be wiped out after 30 years, the loan would typically be cleared before the vast majority were even considering retirement. However, with the maximum term extended to 40 years, not only with the student ‘tax’ be payable for longer, but it may also begin to affect future retirement plans.
Considering intergenerational planning
Full-time undergraduates who started in the academic year 2023/24 are expected to borrow on average £42,800 over the course of their studies (Source: gov.uk: student loan forecasts for England) – a significant sum that can have long-lasting financial implications for graduates. Therefore, intergenerational financial planning is becoming increasingly important. While helping to fund a loved one’s university costs will always depend on individual circumstances, it is crucial for families to consider how they might support younger generations during such a critical period of their lives.
This consideration extends beyond simply paying for tuition – it involves adopting a holistic approach to financial planning. Families can start by implementing early savings strategies – such as opening education savings accounts or junior ISAs when children are young – and exploring alternative funding options like scholarships, grants, and work-study programmes.
Equally important is the need for financial education, enabling advisers, parents and guardians to teach younger family members about budgeting, saving, and responsible borrowing. These conversations should explore various strategies to support the academic and financial futures of the next generation while also maintaining the financial health of the entire family unit – especially as education costs may impact retirement savings or other financial goals for the financial supporter.
What’s more, it isn’t only increasing student loans impacting the financial landscape. Families must also consider the broader economic context, with living costs still rising and job market competition remaining.
Ultimately, the impact of student debt extends beyond just the repayment period – it can affect a graduate’s ability to save for a home, start a family, or pursue further education. By engaging in thoughtful intergenerational planning, families can help mitigate these long-term effects and potentially set up younger generations for greater financial success.
This is intended as an informative piece and should not be construed as advice.
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