A shake-up of student loan repayments means taking a gap year could cost this summer's A level students nearly £47,000. An overhaul coming in September next year means graduates will start paying back the debt sooner and for longer.
Yet a cut to student debt interest rates means graduates who go into high-paying jobs would save £25,000 by delaying their studies this year. School leavers starting university this year will miss the overhaul of student loan interest rates coming next year.
The shake-up will see the repayment threshold – the point at which graduates begin to pay back their student loan – drop from £27,295 to £25,000. The Government will also extend the repayment term by 10 years, which means that graduates face making repayments for 40 years before the debt is wiped.
The policy would cost the average graduate close to £47,000 each in additional repayments, analysis by investment service AJ Bell found.
The new system will also hit average earners, who will never pay off their debt over four decades, the hardest, AJ Bell found. This is because a graduate on an average starting salary of £24,000, who leaves university with £45,000 of debt, repays £27,331 under the current system.
Under the new system, they would pay £73,844 in debt and interest – an increase of £46,512.
Ahead of the changes, a record of more than 316,000 school leavers have applied to start university courses in the autumn, up from 299,180 last year and 264,970 before the pandemic.
The changes coming next year will also see the interest rate charged on student loans cut by 3pc. Repayments are currently calculated depending on salary, and the retail price index (RPI) measure of inflation, plus 3pc. The new system will charge graduates according to salary and RPI alone.
As a result, higher earners stand to gain as they will still be able to pay off the loans faster, but at a lower interest rate.
Laura Suter, senior personal finance analyst at AJ Bell, said: “Someone on a starting salary of £30,000 who sees a few pay rises during their career will repay £35,000 more under the new system. But if they started their career earning £40,000 and saw the same pay rises, they’d actually benefit from the new system and pay £25,000 less.”
She said that the complicated student loan system meant that many students “sleepwalked” into taking out loans, and added: “The financial ramifications could be huge for those going into all but the highest paying careers. Those who would win big from taking a gap year are students going into courses that lead to higher incomes."
The highest paying degrees are in medicine and dentistry, where the average salary five years after graduation is £49,400. Economics ranked second at £38,200, followed by veterinary science at £36,400.
The Department for Education has previously said that students starting in September 2023 are expected to borrow an average of £39,300 in today’s money. The Department forecast that the average borrower will repay £25,300 over the course of their loan, compared with £19,500 in the current system.
The Department also said that the new system protected the lowest earners, as anyone earning under £25,000 would not have to repay their loan.