Education & Family

Student loan early repayment penalty proposal 'abandoned'

Graduates, Liverpool
Early student loan repayments are allowed, without penalties, under the current system

Plans to impose penalties on students in England who pay off university loans early are to be abandoned, ministers are expected to announce.

Business Secretary Vince Cable had intended to introduce an early repayment penalty.

It could have cost graduates thousands of pounds if they had cleared their debts within 30 years of leaving university.

The academics union UCU say the move will benefit the wealthiest in society.

The government held a consultation on the idea of a penalty, which would have applied only to students in England.

Early repayments are allowed, without penalties, under the current system.

The business secretary is believed to have supported the introduction of an early repayment penalty as the Liberal Democrats and Conservatives sought to reach agreement on raising student tuition fees as part of the coalition agreement.

The coalition government had said the system would be "progressive" - that poorer students would pay less.

Ministers were considering introducing annual charges of around 5% on payments above a certain limit to prevent wealthier students avoiding interest charges on the new standard 30-year repayment plans.

'Debt aversion'

The new system, if agreed, would have come into force this year when tuition fees will increase to up to £9,000 annually.

But following the consultation process, the government decided the evidence suggests that those most likely to make extra payments were not the wealthy but those earning around £18,000.

Ministers were concerned it would mean thousands of students could end up losing out and the government is expected to announce within the coming weeks that there will now be no penalty for early repayment of loans.

Last year think tank CentreForum, which describes itself as liberal, said the plans would be ineffective and costly, arguing that most of those who overpay do so because of debt aversion, not because they are wealthy.

Academics in the University and College Union (UCU) criticised the abandonment of plans to impose a penalty for the early payment of loans.

UCU general secretary, Sally Hunt, said: "Government should be prioritising how to make it easier for poorer families to afford university rather than focusing on yet another policy designed to make life easier for the wealthiest in our society. Today's move exposes once again that we really are not all in this together.

"While no one would condemn any family that sought to pay off their children's debt as fast as possible, today's move simply exposes yet again what an inconsistent mess the higher education reforms are."

'Don't pay upfront'

And the National Union of Students said "the on-going lack of clarity from ministers" would create confusion among students and their families.

Liam Burns, president of the NUS said: "Early repayment penalties ultimately risk making the student loans system more regressive, but the issue of whether they should be barred or encouraged is a smoke screen that obscures the truth about paying back earlier than required.

"Paying back early is rarely a rational decision for those who have saved money for college or have a little bit extra to spare and most would be better off investing it in an ISA than handing it to the Student Loans Company."

That view was endorsed by finance expert Martin Lewis, on Twitter.

He said: "Warning to parents - don't borrow to pay tuition fees. In fact, even if you have savings, it's often better not to pay upfront."

Scottish home students do not have to pay tuition fees, while Northern Ireland's government has said fees will not rise for the next four years.

The Welsh Assembly has announced that fees will rise to up to £9,000, as in England, but the government will meet the extra cost to Welsh students studying at any UK university.

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