Student Loans: Repayment Becomes Write Off

New research suggests that it may not make financial sense to pay off student loans early.

The higher education funding system in England for students changed dramatically in 2012/13, with the most notable reform a near tripling of the maximum tuition fee (and corresponding fee loan) from £3,375 to £9,000. The terms for loan repayment were also changed:

The Institute for Fiscal Studies (IFS) had undertaken some new number-crunching on student finance to see what the long term effect of higher and more costly borrowing is likely to be. Its conclusions – which inevitably involve many assumptions – show that in many instances the line between a repayable loan and a non-repayable grant has become blurred:

If you have children or grandchildren at, or likely to go to university, the IFS numbers raise an interesting conundrum. Helping to meet fees or other costs covered by borrowing may simply mean that you are saving the government money because of the 30 year write off. On the other hand, the prolonged burden of debt repayment will leave most graduates still making repayments throughout their forties and, if they are higher rate taxpayers by then, facing an effective marginal rate of tax, national insurance and loan repayment of 51% on debt carrying interest at RPI+3%.