The government has frozen the salary threshold at which graduates start repaying student loans, denting the take-home pay of university leavers in England from April.
The Institute for Fiscal Studies, a think-tank, described the move as a “tax rise by stealth” that would leave graduates earning £30,000 with an additional annual repayment of £113.
Higher education minister Michelle Donelan said on Friday that the loan repayment salary threshold would remain at £27,295 for the next tax year rather than rising by 4.6 per cent in line with average earnings, as is current policy.
The government, which is facing mounting criticism of its handling of the cost of living crisis, had previously considered cutting the threshold, which applies to graduates who took out loans from 2012.
“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 research economist at the IFS. “This will be a further hit to the real incomes of these graduates on top of the rising cost of living.”
Donelan, who previously announced university annual tuition fees would remain at £9,250, said the government imposed the freeze as the “overall cost” of higher education to taxpayers was rising.
She said the combination of the repayment threshold and fees freeze would “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.”
The move came after months of intense wrangling between Downing Street and the Treasury. One senior Whitehall official said chancellor Rishi Sunak had been “absolutely determined” to cut the cost of funding three-year degrees, despite opposition in Number 10 to anything that might be construed as a tax rise.
Matt Western, Labour’s shadow universities minister, condemned the decision. “We have a cost of living crisis made in Downing Street, and whilst Number 10 is in paralysis Rishi Sunak is raising taxes on millions of people.”
Boris Johnson, fighting for his political survival over lockdown parties, is also under pressure from the right wing of his party to delay April’s increase in national insurance. “No 10 has been desperate to avoid being seen putting up charges or taxes of any kind,” said one insider.
Another Downing Street insider described the decision to freeze the threshold as a “massive cave-in” to Sunak and the Treasury, pointing out that it amounted to a real-term cut to graduate’s take home pay.
The National Union of Students said it although it was “pleased” the government had “U-turned” on plans to reduce the threshold, tuition fees should be scrapped.
Nick Hillman, director of the Higher Education Policy Institute, a think-tank, said the decision was “sensible” because the existing system had left the taxpayer shouldering a bigger burden than originally envisaged.
Waltmann said if the freeze was made permanent it “could transform the student loan system, with a much lower cost for the taxpayer and a much higher burden on graduates.”
Donelan said the government would “shortly” set out further plans on the future of university finance.