Martin Lewis warns student loan costs may rise by £400 if shake up goes ahead

The Government is said to be mulling over proposals to drop the repayment threshold for student loans from £27,000 to £23,000 – meaning the changes would hit those on lower salaries

Martin Lewis has warned how student loan costs could rise by £400 per year – and the lowest earners would be worse off.

Reports suggest ministers are considering cutting the threshold in which graduates have to start repaying their loan once they’ve left university.

At the moment, those on a Plan 2 loan repay 9% of their earnings above £27,295, which is the current level of salary you need to earn before you start repaying.

Graduates continue to repay their loan at this level until they either clear the borrowing, plus interest, or it hits 30 years, after which point they stop repaying.

But the Government is said to be mulling over proposals to drop this threshold to £23,000 – meaning the changes would hit those on lower salaries.

Martin Lewis, founder of MoneySavingExpert, warned this could result in costs of repaying your student loan rising to £400 per year for some graduates.

Speaking in this latest MSE video, he said: “This sounds like a trivial difference – it isn’t. It would make a huge impact to increasing the costs of going to university.”

He added: “The numbers show 83% of those who are leaving university are unlikely to repay in full before the 30 years, which means for the vast majority of those who go to university, the student loan system doesn’t work like a loan.

“It works more like an additional tax of 9% for 30 years on all earnings above the threshold.

“That’s why, by lowering the threshold – a bit like lowering the point in which you start repaying tax – the majority of people would have to pay a lot more.”

Would increasing the student loan repayment threshold put you off going to university? Let us know in the comments.

The possible threshold cut was reported by the Financial Times over the weekend, with sources saying that such a move would raise billions extra for the public finances.

The government has yet to officially announce any changes to the student loans system, or confirm if any adjustments to the repayment threshold is in the works.

Slashing the repayment threshold is one of the measures recommended by the Augar review of higher education in 2019.

Other changes it suggested include cutting tuition fees from £9,250 to £7,500 and extending the repayment period from 30 to 40 years.

Commenting on the FT report, a Department for Education spokesperson said: “We continue to consider the recommendations made by the Augar panel carefully alongside driving up quality of standards and educational excellence and ensuring a sustainable and flexible student finance system.

“The student loan system is designed to ensure all those with the talent and desire to attend higher education are able to do so, whilst ensuring that the cost of higher education is fairly distributed between graduates and the taxpayer.”

This isn’t the first time Martin Lewis has spoken out about the student loans system.

Back in June this year, he warned how parents are often unaware of “hidden” costs they’re expected to pay when their children go to university.