Graduates in England face tuition loans ‘stealth’ tax – IFS

The Institute for Fiscal Studies said the changes, if permanent, would place a “much higher burden on graduates” to repay their student loans

The government has frozen the student loan repayment threshold for a year, meaning millions of graduates will face what one think tank described as a “tax rise by stealth”.

The income threshold at which those with undergraduate degrees are eligible for student loan repayments will remain at £27,295 a year for 2022/23, rather than rising with inflation as in previous years.

The move affects those with Plan 2 loans: graduates that completed an undergraduate loan after 2012. The Institute for Fiscal Studies (IFS) estimated that the threshold would have risen to £28,000 to keep pace with inflation.

Pre-2012 undergraduate degrees are unaffected by the decision – but the income threshold for postgraduate loans (Plan 3) will also freeze for a year, at £21,000 per annum.

The move means middle-earning graduates will repay more than they did last year, upping repayments by £600m over the 2022/23 financial year, the IFS predicted. A young person a Plan 2 loan earning £30,000 a year will pay £113 more than they did last year, the think tank calculated.

Michelle Donelan – higher and further education minister – announced the freeze in a written statement to parliament on 28 January.

The overall cost to taxpayers of the system is rising… If we do not keep the threshold at its current level. it would rise by a further 4.6% in April 2022
– Michelle Donelan, minister for higher and further education

The statement revealed that long-term plans for student finance reform are imminent. “We will also shortly set out further plans for addressing the student finance recommendations made by the Independent Panel that reported to the Review of Post-18 Education and Funding,” Michelle Donelan announced.

That statement brings tantalisingly close the possibility of a resolution to the Augar report, published in the final days of Theresa May’s premiership in 2019. The government has considered its response to the report ever since.

Last year, at the time of the announcement of the government’s budget, chancellor Rishi Sunak confirmed funding for skills, research and training – but not higher education.

Treasury documents released alongside the budget in October 2021 revealed that the government would set out further details of the HE settlement and the response to the Augar report “in the coming weeks”.

Setting out her reasons, Donelan explained: “The overall cost to taxpayers of the system is rising. Since 2018, the repayment threshold for Plan 2 student loans has increased each April in line with changes in average earnings. If we do not keep the threshold at its current level. it would rise by a further 4.6% in April 2022.”

She added: “Postgraduate loan outlay is forecast to increase in coming years, and 30% of borrowers holding a master’s loan (academic year 2020/21 entrants) are not expected to repay their loans in full.”

She said it was crucial higher education “is underpinned by just and sustainable finance and funding arrangements” for students and taxpayers.

In response, the IFS said the impact of the “stealth” tax would become more significant if the threshold freeze endures beyond 2023.

“Today’s announcement of a freeze in the repayment threshold on student loans effectively constitutes a tax rise by stealth on graduates with middling earnings,” said Ben Waltmann, senior IFS research. “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.”

“What really matters is how long this threshold freeze will stay 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. 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.”

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