Student loan repayments could leave graduates £185,000 worse off in retirement

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Lower student loan repayments could give graduates thousands more to put towards pensions and house deposits

Graduates could be left with £185,000 less in retirement savings because of the amount they are paying towards their student loans, a new report suggests.

The warning has sparked calls for student loan repayments to be slashed from nine per cent to five per cent, giving graduates more money to put towards their future.

A typical graduate in England now faces lifetime student loan repayments of £56,240, according to research from the Intergenerational Foundation (IF).

That is more than double the £25,700 expected from those who started university before the 2012 reforms.

The think tank's report, Repayment Repression, argues that rising repayments have been driven largely by changes to loan terms made after students took them out, alongside a fall in Government funding for higher education.

The IF is calling for the repayment rate to be cut from nine per cent to five per cent for graduates on both Plan 2 and Plan 5 loans.

It estimates that if graduates put the money saved from lower repayments into their pensions instead, they could build up an extra £185,000 by retirement.

Alternatively, putting those savings towards buying a home could boost a deposit by £16,000 over 15 years.

Lower earners have seen an especially large increase in student loan repayments. Their expected lifetime repayments have risen more than sixfold, from £6,430 for those who entered university before the 2012 reforms to £42,070.

The report argues that much of the increase has come from changes made to student loan terms after borrowers had already signed up.

Two recent changes to Plan 2 loans alone are expected to add £23,730 to the average borrower's lifetime repayments, according to the IF.

Nearly all of those affected had already started university when the changes were introduced.

The report also raises concerns about Plan 5 loans, which apply to students who started university from 2023/24.

Graduates on average incomes are expected to repay £16,040 more under Plan 5 than Plan 2, while lower earners could pay an additional £21,780.

Toby Whelton, the report's author, described Plan 5 as "a ticking time bomb, set to detonate as today's students enter the workforce and confront repayment terms harsher than those faced by previous cohorts."

The IF argues that falling Government investment in higher education is a major reason graduates are being asked to shoulder more of the cost.

Its modelling suggests the Exchequer's expected contribution towards a typical graduate's education has fallen from £26,600 for those starting university in 2015/16 to £4,200 for current cohorts.

For lower earners, the estimated Government subsidy has fallen from £48,100 to £14,800.

Mr Whelton said: "Much has been made of high interest rates and rising outstanding balances, but these are symptoms of a more insidious and significant transformation: the withdrawal of government investment from what was always intended to be a shared-cost system."

He added: "By stealth and with minimal democratic scrutiny, successive governments have piled costs onto young graduates in the hope that nobody would notice."

Women are expected to be particularly affected by the move to Plan 5. The average female graduate is projected to repay around £25,000 more than under Plan 2, while the average male graduate is expected to pay around £4,000 less.

The report also warns of what it calls a "social mobility penalty".

Under Plan 2, higher earners who took out the maximum maintenance loan are expected to repay £29,100 more than those who borrowed the minimum. The IF warns that Plan 5 will extend this problem to a wider group of graduates.

By the mid-2030s, around half of employed Plan 2 graduates are forecast to be higher-rate taxpayers, taking their combined marginal tax rate to 51 per cent.

Current university starters are also expected to pay £73,000 more in tax during their first 25 years after graduation than those who went to university before the 2012 reforms. For lower earners, the increase is 74 per cent.

Alongside cutting the repayment rate to five per cent, the IF wants maintenance grants restored to their 2016 level.

It is also calling for student loan repayments to be calculated on income after pension contributions. The think tank argues this would remove a disincentive to save for retirement and mean pension contributions are taxed when the money is withdrawn rather than when it is paid in.

The IF has also called for student loan terms to be reviewed every five years, improved Government data and expected lifetime repayment figures to be included on borrowers' statements. It wants further safeguards to protect graduates against retrospective changes to their loan terms.

Mr Whelton said: "Fairness can be restored only by reasserting the state's responsibility to invest in young people's education and future. Anything less will fail to deliver meaningful change for graduates."