Student loan early repayment fee scheme scrapped

Posted:

16 February 2012

by Luke Thomas

The government is to abandon a plan to penalise students who pay back their university loans early.

Vince Cable, the Business Secretary, had designs on introducing a 5% fee on any portion of an individual’s student loan repayments which exceeded the normal rate. This was to prevent wealthier graduates from escaping the projected interest over the usual 30 year repayment window.

However, a recent government consultation discovered that it would more likely be those who were earning around £18k per annum – as opposed to people on a far higher wage – who would be hardest hit by the proposal. This discovery has led the coalition to scrap the plans in the interests of fairness.

The scheme, which was only to be applicable in England, had been spearheaded by the Lib Dems, intended to be part of an overall plan to impose pricier repayments on those who had seen the most benefit from their university degree and were therefore earning at a higher rate.

The additional fee would have been in place to ensure that it was not possible for higher earners to pay off their debt right away. This would have led to them evading this “graduate tax” by paying off less interest over the total period of the loan, unlike those who earned less.

The consultation revealed, however, that those who paid off their loan sooner were often doing so in order to avoid a lifetime of debt, rather than because they were particularly wealthy.

Tuition fees are set to increase to as much as £9,000 annually this September, with the new student loans package aimed at softening the financial blow. Student loans automatically begin repayment when the graduate is earning £21,000 or more per year, with any sum which is left outstanding after 30 years being written off.