Graduates will pay more as loan repayment threshold is lowered
Hundreds of pounds a year will be cut from graduates’ take home pay following a government decision to lower the threshold for student loan repayment in England, hitting middle-income earners the most while benefiting those on a higher salary.
The Department for Education announced on Thursday that it would reduce the salary threshold for repaying loans from £27,295 to £25,000 and increase the amortization period for student loans from 30 to 40 years. The changes will affect students entering university next year.
The changes were announced in a long-awaited response to the Augar Review, a survey of the higher education sector which delivered its recommendations in 2019.
Michelle Donelan, the Minister for Higher and Further Education, said the changes were aimed at “bringing fairness to the system” and preventing unpaid student debt from being “paid by the taxpayer”.
But Paul Blomfield, chairman of the All-Party Parliamentary Group for Students, said the approach would ‘make graduates pay the price, with those on the lowest incomes being hit hardest’.
The government will also reduce interest rates on student loans from their current level above inflation, allowing graduates to pay back no more than they borrow.
Currently, graduates earning over £27,250 must contribute 9% of their salary towards student loan repayment. After 30 years, the loans are cancelled.
The government has estimated that 54% of student loans will never be repaid, with the present value of outstanding debt standing at £161billion.
Chancellor Rishi Sunak is keen to reduce the cost of writing off defaulted loans and believes the new reforms will be “sustainable”, according to his allies.
However, Dr Gavan Conlon, of economic consultancy London Economics, called the changes “regressive”.
“The graduates who will benefit the most from these policies are the highest earning graduates, mostly men,” he said, adding that most others “will be worse off.”
Conlon estimated that the government would claw back £540m per cohort of graduates as a result of changes over their working lives, equivalent to around 5% of its total expenditure, but distributed unevenly.
Under the current system, only the highest earning graduates repay their loan, and the real interest rate means they stay in the system and continue to make repayments, ultimately paying more and subsidizing the lowest paid.
Reducing the real interest rate will mean that these wage earners will pay less. In contrast, extending the repayment period to 40 years would mean that low- and middle-income graduates would pay off their debts for even longer in their working lives, Conlon said.
Martin Lewis, founder of Money Saving Expert, a financial advice platform, said the lower threshold would leave the typical graduate repaying over £200 a year, while the extended repayment period would increase repayments by the thousands.
“This [the changes] effectively completes the transformation of student ‘loans’ for the most part, into a tax on graduates throughout working life,” he said.
The changes will not affect current students or graduates, after the government confirmed last month that their reimbursement threshold would be frozen at £27,250.
Lewis welcomed it, but said the decision to freeze it until 2025 would add around £5,000 to the most-reimbursed total.
As well as changing loan repayment terms, the government announced more details of a consultation on more flexible loans for further education, which Donelan described as “resulting in a revolutionary change in the way students can study. , retrain and improve throughout their lives”.
Other measures include the decision to freeze the cap on tuition fees at £9,250 for two more years, cutting funding to universities at a time of rising inflation.
The government will also consult on proposals to prevent potential students from accessing loan funding if they do not pass the GCSE in English and maths.
Vanessa Wilson, chief executive of University Alliance, said that “with any reduction in funding, something will have to give” in higher education. Minimum entry requirements “would go against the demands of students and the economy and would be guaranteed to level down, not up”, she said.