Student Loan Repayment Freeze to Add £250 to Annual Costs for Graduates
Chancellor Rachel Reeves has announced a significant policy shift that will impact millions of graduates across the United Kingdom. The Labour Government's decision to freeze the student loan repayment threshold at £29,385 until the year 2030 is projected to cost working-age adults an additional £250 per year on average.
Financial Impact on Graduates
The freeze affects approximately four million individuals with outstanding student debt, leading to increased deductions from their wages. By the time the threshold begins to rise again in 2030, graduates could face roughly £250 in extra annual payments. This move has sparked criticism, with accusations that the Government has unfairly altered the terms that school-leavers originally agreed to.
Charlene Young, a senior pensions and savings expert at AJ Bell, highlighted the practical implications. "They lose £51 from a £100 pay increase," she explained, emphasizing the real-world impact on recent graduates striving for successful careers.
Long-Term Financial Projections
Ms Young provided a detailed example to illustrate the cumulative effect. A graduate who attended university during the pandemic, took out a plan 2 loan, and now works in London could see their salary progress to around £60,000 by their 30th birthday. At this level, they would face income tax of approximately £11,500, National Insurance contributions of £3,200, and a student loan deduction of £2,800.
Once a modest five percent personal pension contribution is factored in, take-home income could slip below £40,000 annually. Ms Young noted, "As a rough guide, around the £60,000 salary mark, graduates with a £50,000 balance on a plan two loan start paying back the capital on the loan."
Strategies for Managing Debt
For those considering early repayment options, Ms Young suggested that parents could gift children cash to make voluntary overpayments and clear the debt, particularly if it seems a sensible move by their mid-20s. This approach could help mitigate the long-term financial burden imposed by the freeze.
Chancellor Rachel Reeves defended the decision, stating that the freeze for some student loan borrowers is "fair and proportionate." However, the policy continues to draw scrutiny as graduates brace for increased financial pressures over the next several years.
