Penalising graduates who pay off their loans early is "crazy"

9 September 2011

Coalition plans to introduce early redemption penalties for student loans will be costly and ineffective, a new report by the liberal think tank CentreForum finds.

The report 'Early repayment of student loans: should government impose early repayment penalties?' criticises the government's intention to introduce early repayment charges for graduates on high incomes or those making large repayments.

The thinking behind the charges is that the government will be able to recoup some of the money lost through non-payment of interest. But CentreForum believes that the sums raised will be small relative to the costs and that it will add an unnecessary layer of complexity to the student loan system.

The report suggests that debt aversion not affluence is the biggest cause of early repayments, most of which are small and made by relatively poor graduates who will not be affected by the proposed penalties.

It points out that the people the government is hoping to charge (the very rich) will often pay their university fees upfront, bypassing the loan system altogether.

Report authors Tim Leunig and Gill Wyness said:

"Introducing a system of early repayment penalties for affluent graduates, or those who pay off large chunks of their loans, is crazy.

If the government wants to protect the progressivity of the student loan system, it should actively discourage low income graduates from making early repayments, since they will almost always lose out from doing so."



A copy of the CentreForum report 'Early repayment of student loans: should the government impose early repayment penalties?' can be downloaded.