IN a new “stealth tax rise”, millions of graduates will be forced to pay an £113 increase in student loan repayments from April.
Ministers have scrapped plans to raise the student loan threshold by 4.6% for the first time in three years, which will affect middling earners the most.
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The freeze will cost those who earn £30,000 another £113 a year more than previously, the Institute for Fiscal Studies has warned.
That means graduates will have to shell out more of their disposable income as wages and prices rise with inflation.
IFS senior economist Ben Waltmann said it “effectively constitutes a tax rise by stealth on graduates with middling earnings,” as well as it being “a further hit to real incomes.”
Graduates on ‘Plan 2’ which are loans issued after 2012, will pay back their loans at 9% of everything they earn over £27,295 per year.
This threshold was raised from £25,000 in 2018/19, £25,725 in 2019/20 and £26,575 in 2020/21 to keep up with rising prices.
But now it will be frozen – despite inflation hitting 4.8% and economists warning it is set to rise further by April.
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‘The Plan 3’ threshold will also remain at £21,000 – while tuition fees will be frozen at £9,250 for the fifth year in a row.
The change in policy was revealed this afternoon in a written statement to Parliament.
A Department for Education spokesperson said: “It is now more crucial than ever that higher education is underpinned by a sustainable finance and funding system.
“We need to ensure the system remains fair and open to everyone who has the ability and the ambition to benefit from it.”
However Mr Waltmann warned it is “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.”
He continued: “Graduates with the lowest earnings do not reach the repayment threshold for student loans, so they will be unaffected by the freeze.
A further hit to real incomes
Ben Waltmann
“Those with the highest earnings will pay off their loans either way, so the freeze just means that they will repay their loans quicker.
“For a graduate earning £30,000, this announcement means that they will pay £113 more towards their student loan in the next tax year than the government had previously said.”
IFS director Paul Johnson added: “That’ll be a 6 or 7% real terms reduction and hence a real terms increase in repayments of c. £150 a year on graduates with student loans.
“Not an obvious response to ‘cost of living crisis’.”
Universities Minister Michelle Donelan defended the move, saying “the overall cost to taxpayers of the system is rising”.
She explained that the government will “shortly set out further plans” to reform the system, which it has been claimed could slash the repayment threshold back down to £25k.
Shadow Universities Minister Matt Western said: “We have a Cost of Living crisis made in Downing Street.
“Whilst No10 is in paralysis Rishi Sunak is raising taxes on millions of people.”
