Student loans can be a cause of concern for doctors with children around that age. No one really likes to think of their children as being in debt. Doctors may therefore be interested in the impact of a recent change to the repayment of student loans.
The income thresholds at which repayments start to be deducted from the graduate’s salary increased on 6 April 2018. These are now as follows:
- £25,000 a year for English and Welsh students who started their undergraduate course after 31 August 2012 (up from £21,000)
- £18,330 for English and Welsh students who started their undergraduate course on or before 31 August 2012 and all Scottish and Northern Irish students (up from £17,775)
The rates of interest paid on student loans are as follows:
- For 2012 students who are still studying, RPI (a measure of inflation) + 3%. This equates to 6.1% for the current year
- For 2012 students who have finished studying, the rate is on a sliding scale rising from RPI at £25,000 of income to RPI+3% at £45,000 of income
- For pre-2012 students, 1.5%
According to the Institute for Fiscal Studies, this seemingly minor technical change “will save middle earning graduates a lot of money – up to £15,700 over their lifetimes”. In terms of take home pay, however, they may not necessarily notice the difference as another change affecting pay packets was brought in at the same time: an increase to the minimum employee pension contributions under auto-enrolment. The pension contribution increase is enough to wipe out the loan repayment savings at an income of about £28,500 or more.
The 6.1% headline rate for current students does panic some of our clients, and of course lower repayments mean a longer period of making payments with more time for the interest to compound upon itself. However, it must be remembered that the loan has a maximum period of 30 years after which any outstanding amount is written off. Unlike other debt it doesn’t always make sense to clear a student loan as this could mean paying off debt that would have otherwise been written off in time. The lowest earning 40% of graduates are actually better off under the current system than the pre-2012 students paying 1.5%, whose repayments start at a lower threshold.