The Westminster government has been accused of imposing “a tax rise by stealth” on graduates after it froze the repayment threshold for student loans in England.
The earnings threshold at which graduates start repaying their loans currently stands at £27,295 a year and typically increases in line with inflation each year. It had been due to rise above £28,000 this year but, in a statement to Parliament, higher education minister Michelle Donelan said that it would instead be held steady.
The Institute for Fiscal Studies (IFS) said that the decision meant that a graduate earning £30,000 would pay an additional £113 towards their debt in the coming tax year.
Ministers have reportedly been keen to reduce the loan repayment threshold – perhaps to £22,000 – in a bid to reduce the cost of the student finance system to the Treasury. Under the current system, 44 per cent of the value of student loans taken out by this autumn’s freshers will ultimately be paid by taxpayers, as under current terms outstanding balances are written off after 30 years, and four out of five borrowers never pay back their debt in full.
However, with the government yet to issue its long-awaited response to the Augar review of higher education financing, the threshold freeze is the solution for now, at least.
Ben Waltmann, a senior research economist at the IFS, said that the decision “effectively constitutes a tax rise by stealth on graduates with middling earnings”.
“Graduates with the lowest earnings do not reach the repayment threshold for student loans, so they will be unaffected by the freeze. Those with the highest earnings will pay off their loans either way, so the freeze just means that they will repay their loans quicker,” he said.
“For a graduate earning £30,000, this announcement…will be a further hit to the real incomes of these graduates on top of the rising cost of living, the freeze in the personal allowance, and the hike in National Insurance rates.”
Mr Waltmann acknowledged that “what really matters” was how long the freeze remained in place.
“If it is only for one year, the impact on graduates will be moderate, and the government can only expect to save around £600 million per cohort of university students,” he said. “If it stays in place for longer, it could transform the student loan system, with a much lower cost for the taxpayer and a much higher burden on graduates than they thought they had signed up for when they took out their loans.”
In her statement, Ms Donelan said that it was “now more crucial than ever that higher education is underpinned by just and sustainable finance and funding arrangements”.
“Maintaining the repayment threshold at its current level, alongside the ongoing freeze in fees, will help to ensure the sustainability of the student loan system, while keeping higher education open to everyone who has the ability and the ambition to benefit from it,” she said.
Ms Donelan, who said that the response to the Augar review would be published “shortly”, also confirmed that the repayment threshold for postgraduate student loans would be frozen, at £21,000 a year.
