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Number of UK graduates repaying loans rises to 2.5mn

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Thousands more UK graduates are paying back student loans after the government last year froze the income threshold at which payments start, in advance of a further squeeze on new students this autumn.

Data published by the Student Loan Company on Thursday, showed that the number of students making repayments leapt to 2.5mn, representing a 13 per cent increase year-on-year as average contributions crept up to £1,080 annually in England.

SLC figures shows the impact of the government’s decision to freeze thresholds in January 2022. A new cohort of students will face extra pressure when starting courses this autumn as they will be required to pay their loan back at a lower threshold of £25,000, down from £27,275.

“For some graduates this will amount to £20,000 over their working life,” said Kate Ogden, senior research economist at the Institute for Fiscal Studies. She said the new system would squeeze middle-income earners.

The government’s actions are seen by critics as increases in a de facto tax on graduates. Labour has pledged to lower monthly student loan repayments if elected, but has yet to set out how it would implement proposals it claimed wouldn’t affect government borrowing.

SLC said that on average English students graduated with debt around £45,000, a figure consistent with the previous two years. A person with average levels of debt would need to earn £62,795 a year or more to repay the interest accrued on their loan in the period, said the IFS.

Analysis by the think-tank showed that a sharp increase in the maximum interest rate charged on student loans to 7.1 per cent, meant an average graduate needed to earn 36 per cent more compared with last year to keep up with interest accrued on their student loan.

Line chart of Maximum interest rate (%) showing Spiked rates mean graduates will make repayments for longer than they initially expected

SLC figures also showed that the total loan balance grew in line with previous years from £181.6bn in 2021-22 to £205.6bn in 2022-23. Accrued interest rose 78.3 per cent to £8.3bn, despite the government carrying out the largest “reduction of student loan interest rates on record”.

The current rate-setting environment would have meant graduates faced interest on loans up to 12 per cent last autumn, but the government intervened in November to cap the rate at 6.5 per cent until February 2023, before increasing to 6.9 per cent in March and 7.1 per cent from May, a rate fixed until August.

Ogden added that frozen repayment thresholds meant individuals earning over the level set would pay an additional £340 each year than they otherwise would have, if thresholds had risen in line with expectations.

Column chart of Total amount repaid (£bn) showing Graduates made higher loan contributions due to frozen thresholds

Graduates in England are required to pay back 9 per cent of their earnings above a set threshold, depending on when they completed their undergraduate degree. Separate thresholds exist for postgraduate loans and in the devolved nations.

The body also reported a spike in the amount of voluntary payments made by students in England, increasing 47.3 per cent year-on-year to £542mn in 2022-23. The current loan structure means only those likely to pay back the loan in full benefit from such contributions.

“It does make sense for some people, particularly higher earners to make voluntary contributions but overall the majority of people will still never pay off their student loans and they will be written off,” said Brian Byrnes, head of personal finance at investment app Moneybox.

The Department for Education said: “Student loans protect lower earners and ensure those who benefit financially from higher education make a fair contribution towards its costs.”

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