Penalty scrapped for students paying off loans early

Published on 1 January 1970 by Raffick Marday

University students who took out a government loan will not be penalised for repaying them early, Prime Minister David Cameron has announced.

Last year, Business Secretary Vince Cable proposed that an early penalty should be introduced if graduates cleared their debts within 30 years of leaving university.

The Prime Minister has now dropped the scheme, warning that it would be unfair on the hundreds of thousands of people looking to pay back their loans early.

In a consultation, which applied only to students in England, the government decided not to introduce the scheme that could have cost graduates thousands of pounds if they paid off debts sooner.

Under the new scheme early repayments are allowed without penalties.

The Business Secretary is believed to have supported the scheme which was part of the Liberal Democrats agreement with the Conservatives over the raised student tuition fees.

Ministers were planning on charging around 5% annually on payments above a certain limit to prevent students avoiding interest charges on the new standard 30 year repayment scheme.

From September, students will be charged up to £9,000 a year to study at specific universities in England or Wales. The loans on offer to each individual could be up to £16,000 to cover tuition fees and living costs. Under the current system, which was proposed last year, once a graduate earns more than £21,000 a year, he or she will repay 9% of their earnings. The higher the salary, the more interest will be paid back.

In order to prevent wealthier students and those with financial support from mum and dad paying the loan back early, a 5% fee would be enforced on early repayments.

For a number of students, having too much money is not a problem. Thousands of them are being targeted by high interest short-term cash lenders and payday loans companies.

Many students are getting themselves further into debt by taking out credit cards on top of their student loans.


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