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Students won’t be punished for early repayments – hoorah!

Graduate celebration

Good news for those who plan to pay off their student debt early. Last year we wrote to the Universities Minister to challenge plans to penalise early repayments. It looks like the government now agrees with us.

Today the government announced that it’s ditched plans to introduce a 5% charge on payments above the required minimum.

We have previously argued that this is far from the best tool to promote fairness and is not as progressive as some have claimed in the past, so we’re delighted with this news.

Who pays back early?

The main argument the government had put forward in favour of early repayment charges was that they were progressive. Students with higher salaries and with wealthier parents would be able to pay their debt back earlier thereby escaping future interest charges.

On the face of it, this seems like a good idea. But is it really true?

Wealthier families might actually choose to pay tuition fees upfront rather than taking out a student loan. This means that this system wouldn’t actually result in everyone sharing the burden fairly as some students – usually the wealthiest – wouldn’t be part of it in the first place.

The plans also reveal a popular misconception of thinking that only the wealthiest would choose to pay back early. In fact, some students might simply choose to get rid of the debt burden as soon as possible regardless of their income. Prioritising debt repayments over spending can be a good thing – surely responsible budgeting should not be penalised.

Sending the right signal

If implemented, the penalties would also have meant that student loans would be treated very differently from commercial loans. Penalising overpayments sends the wrong signal to consumers in terms of how they should be dealing with debt.

We are generally encouraged – and rightly so – to pay off debts as soon as possible. Making an exception for student loans contradicts the principles of responsible borrowing and existing best practices in the credit industry.

Student loans are often the first experience young adults have of credit and debt. It is important that the government uses this opportunity to help shape responsible approaches to borrowing.

Student loans should not result in a ‘normalisation’ of debt and make it a permanent feature of people’s adult lives – especially not if people want to focus on long-term financial goals such as starting a family and saving for their retirement. It is important that young people become debt free as soon as possible to help them deal with their future expenses.

Comments
Member

Commonsense prevails for once. Anything that can cut down the number of people in debt has to be a step forward.

Member

Hurray. We should be encouraging the reduction of debt. It is bad enough that they have had to incur so much.

Member

Interesting though that the only ones likely to be able to afford to pay the exorbitant university fees back early are the rich – isn’t it?