Graduates may be penalised for making early repayments

Sep 9, 2011   //   by sam   //   Personal Debt  //  Comments Off on Graduates may be penalised for making early repayments

Proposals suggested by the Coalition to charge graduates for clearing student loans early would be ineffective and costly, says the think tank CentreForum.

Plans to penalise those that choose to repay loans early are currently under discussion by the government, which would effect high earners, large repayments, or both.

The idea is to use penalties to make the system “more progressive” and not to negatively impact graduates earning modest incomes.

However, according to CentreForum, the majority of early payments are not made by higher earners.

If the new system is given the go-ahead, it is expected to come into force next year, along with the tuition fee increases that will see new students paying up to £9,000 a year.

The student finance culture can lead people into borrowing thousands of pounds, leaving graduates in large amounts of debt before they even bring home their first pay packet. From large overdrafts offered with student accounts, to student credit cards as well as student loans and tuition fee loans, it doesn’t take long to see the debts stack up.

Under the new tuition fee system, payments are initially being taken care of by the government, then later repaid gradually once the student has finished studying and is earning £21,000 or more per year. If there are any outstanding debts left over after 30 years, they are written off.

According to the coalition, the system has always been progressive, seeing graduates that earn more repaying more.

As graduates earn more, the interest rate is increased, from the bottom level set at the rate of inflation (RPI) (those earning £21,000 or less) to RPI plus 3% for higher earners (earning £41,000 or more).

But there are concerns that by allowing loans to be paid off early, higher earners, or those that come from wealthy families, will be given an unfair advantage allowing them to effectively “buy themselves out of this progressive mechanism”.

Under the current system, early repayments are permitted without incurring penalties.

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