Early Payment Penalty Lifted for UK Student Loans

After the Liberal Democrats looked to impose an extra fee for students who want to repay their university loans early, Prime Minister David Cameron and the majority Conservative party in the UK coalition government has intervened and dropped the scheme amid warnings that it would be unfair on the hundreds of thousands of people expected to repay their loans early.

Vince Cable, the Business Secretary, had intended to introduce an early repayment penalty which would have cost graduates thousands of pounds if they cleared their debts within 30 years of leaving university, writes Robert Winnett and Tim Ross at the Telegraph.

But the dropping of the deal comes after an agreement between Cameron and Cable after the Prime Minister allowed Cable to appoint the controversial Prof Les Ebdon as the Government’s new university admissions tsar.

A government source said:

“The Lib Dems were very keen to appoint Ebdon and we felt very strongly about penalties for early repayment of loans. This is hopefully good news for tens of thousands of families, as well as many Conservative MPs who had raised concerns about the penalties.”

This comes after the government made the decision to allow universities in the UK to raise their tuition fees to up to £9,000, with many choosing to impose the maximum. Students with this are able to take loans of more than £16,000 a year to cover these fees and living expenses.

Once a graduate earns more than £21,000 a year he or she will repay the equivalent of nine per cent of their earnings, writes Winnett and Ross.

“The higher their salary, the more interest they will pay, up to a maximum of inflation plus three percentage points for those earning more than £41,000.

“The system was designed as a form of “graduate tax” so that those benefiting most from a university education would repay most.”

However, to prevent students from richer backgrounds from opting out of the “progressive” system, a levy of five per cent of the value of early repayments was suggested.

So, for example, if somebody had a loan debt of around £40,000 and they wanted to pay it back early, there would be a £2,000 penalty fee.

At the time, a government spokesman said:

“It is important that those on the higher incomes are not able unfairly to buy themselves out of the progressive mechanism.”

However, Prime Minister Cameron’s decision to drop the proposal is thought to have come amid parent concern that their children could face a lifetime of debt from university and may be forced to take out further loans to make the repayments.