Early loan repayments a 'gift to the government'

Students who repay their tuition fees early may simply be making an unnecessary "gift to the government", an economist has warned.

February 23, 2012

Plans to levy hefty charges on graduates who pay off their university loans early were scrapped last week, reportedly to placate Conservative MPs, in a deal that allowed Vince Cable, the business secretary, to appoint Les Ebdon as the new director of the Office for Fair Access.

The early redemption penalties were designed to stop students buying themselves out of interest charges over their 30-year repayment plans, but they were denounced by some as an unfair penalty on middle-class families.

However, Tim Leunig, chief economist at the liberal thinktank CentreForum, said graduates should think twice about paying off their debts early because most will never repay the full amount within 30 years, after which time arrears are written off.

He said a graduate earning £30,000 a year, in perpetuity, who paid off 10 per cent of a £38,250 loan early would not reduce their repayments at all.

"Every penny of their early repayment is a gift to the government," said Dr Leunig, lecturer in economic history at the London School of Economics.

Dr Leunig said in a report published in September: "Given that the average person making a voluntary early repayment currently is 25, and earns just £18,400 a year, it is likely that many of these people are repaying money that they would not end up repaying at all."

A graduate would need to earn £42,750 a year for 30 years to pay off their debts, Dr Leunig said.

Early repayments would have little impact on the overall size of the student loan book, he added.

"Few people have £40,000 sitting around, and extra repayments are likely to be a small percentage of the total owed," he said.

Liam Burns, president of the National Union of Students, also warned against early repayments.

"Ministers must come clean on student finance to ensure that those on low and middle incomes are not duped into chipping away at their outstanding debt," he said, adding that it "rarely makes financial sense to do so".


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