Student loan repayment penalty to be scrapped

by Simon Ward on 16 February 2012  |  3 comments
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The Government is set to announce that plans to charge penalties of up to 5% for making early repayments on student loans will be axed.

The Government is set to scrap plans to charge graduates from England repayment penalties for paying off their student loans early.

The Liberal Democrats had proposed charging penalties of around 5% of the value of loan repayments over a certain threshold. They claimed it would prevent wealthier students avoiding interest charges.

However, research reportedly found that even graduates earning £18,000 a year would want to make some additional repayments.

There were also concerns that parents would borrow money to help their children pay off their loans more quickly.

The Treasury is reported to have backed the scrapping of the charges as it means loans will be repaid more promptly.

Reports say that the Lib Dems have agreed to back down on repayment charges in exchange for the appointment of Professor Les Ebdon to head the Government’s Office for Fair Access.

From September, new full-time students from England can borrow up to £16,675 a year to help them pay for tuition fees and living costs during their studies. At the same time, many universities in England and Wales will begin charging students the new maximum level of £9,000 a year for tuition fees. However, the Welsh Assembly has pledged to cover the increase in fees for this year’s intake.

English and Welsh graduates from the 2012/13 intake have to begin repaying student loans once they begin earning upwards of £21,000 a year. However, this won’t begin until April 2016, irrespective of when they finished their course.

Once they earn over £21,000, interest is added at the Retail Prices Index (RPI) rate of inflation. This is then increased on an incremental scale, so the higher the graduate’s salary, the more interest they will be charged. This will rise to a maximum of RPI inflation plus three percentage points for those earning £41,000 a year or more.

Any loan amount remaining after 30 years will be written off.

The Government is expected to confirm the plans to scrap repayment penalties next week.

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