How would cutting the earnings threshold for student loan payments impact on generation rent?
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The government is rumoured to be planning a cut to the earnings threshold at which graduates begin repaying their student loans. This means people will have start paying back student loans sooner, on top of a challenging financial market. With statistics revealing that generation rent, who will be impacted the most by this decision, are not confident in their finances, how will this impact on their pension contributions?
What financial challenges do generation rent face already?
Generation rent, a term used to describe adults aged 18-40 who have been priced out of the housing market, face financial difficulties from multiple different areas. A period of low interest rates and student loans are two of the biggest reasons for increasing the difficulty of saving to buy.
According to statistics from a survey conducted by Focaldata in June, more than one in three private renters could last less than a month on their savings, compared to one in six with a mortgage and one in twenty who own outright.
“Generation rent is being wrung dry, and the spending squeeze is making it worse,” says personal finance analyst at Hargreaves Lansdown, Sarah Coles.
Only one in five private renters say their finances are in good shape, compared to half of those who own their own home outright, and a third of those with a mortgage. “Their finances are on a knife edge, so even the smallest surprise runs the risk of causing financial chaos,” says Coles.
What impact will cutting the student loan threshold have?
In 2019, the Augar review of post-18 education recommended the threshold be lowered from £27,295 to £23,000. The most recent model suggested by the Higher Education Policy Institute suggested a cut to £20,000, although nothing has been confirmed yet.
This cut would significantly impact the take-home pay of young people. Research by the Institute for Fiscal Studies found that graduates earning the current threshold would have their take-home pay cut by more than £800 annually after deductions, taking into account this month’s increase in National Insurance contributions.
Strategy director at the Investing and Saving Alliance, Prakash Chandramohan, says timing is especially important for younger people: “As soon as they hit the threshold, they’re still probably going to have debts to repay, and now they’ve got the student debt to repay before they ordinarily would have.”
Recent research from TISA revealed that retired renters will run out of money 12 years earlier than retired homeowners. “It’s a major discrepancy and shows how important it is for government to not make it harder for young people to get on the housing ladder,” he says.
With the earnings threshold for automatic enrolment being £10,000 from age 22 – which is expected to be lowered to age 18 in the mid-2020s – mmost employed graduates will be automatically enrolled, adding to the cut in their take-home pay. Contribution rates are currently at 8%, which TISA’s research suggests is too low. “The DWP should be increasing it to 12% to give people a greater chance of a quality retirement,” says Chandramohan.
With the furlough scheme coming to an end, National Insurance contributions increasing by 1.25% next year, and the student loan threshold reducing in the near future, it is expected that there will be a fall in pension contributions.
Chandramohan says to build up resilience, consumers have to start engaging in their finances, investing and saving properly. “There’s no silver bullet to that. People are largely unengaged and uninformed, especially with their pension,” Chandramohan says.
“It’s the financial services industry’s responsibility to support consumers, but then the government needs to set up a regulatory and legislative framework that actually allows firms to support consumers,” he says.
How can the financial service industry support consumers during this time?