By Ben Riley-Smith, Political Editor
12 November 2021 • 9:30pm
Graduates will have to give up more of their income to repay their student loans faster under government plans to raise around an extra £2.5 billion a year.
Currently, graduates only have to start paying off their student loans when they earn £27,295 a year – but that would drop to as low as £22,000 under the new plans.
The change means all graduates earning roughly more than the average salary face paying up to £475 extra to the Treasury every year.
The move is likely to spark a political row because young people have seen their prospects hit hardest by recent tax changes, while pensioners’ benefits have been relatively protected.
It comes with the Tories already under pressure to appeal to people in their 20s and 30s, amid challenges getting on the housing ladder and National Insurance increases.
However, the Treasury is expected to argue that the current system is unfair because billions of pounds in university debt is never repaid and all taxpayers underwrite the cost of those who choose higher education.
One Whitehall insider defended the change, saying: “It is a fairness argument. Normal working people, a lot of whom do not go to university and benefit from student loans, are paying for this.”
Details of the new approach are expected to be announced within weeks as part of a series of reforms to student loans and tuition fees. For months, discussions about the reforms have been closely guarded between a few ministers and government officials, with final decisions yet to be taken.
But Whitehall figures have disclosed the latest thinking about the student loan reforms, which they say has been driven by creating a “fairer” system for graduates and taxpayers.
There is an emerging consensus within Number 10, the Treasury and the Department for Education that the salary threshold for paying back student loans should be lowered.
One option being considered is dropping it to £25,000 – roughly the annual income. A second option is to reduce it to as low as £22,000. Dropping the threshold to £25,000 would save the Treasury around £1.1 billion for each new year of students, according to an analysis, while reducing it to £22,000 would save £2.7 billion.
Government sources said the latest thinking was that the change would apply to new students, although think tank figures predict it could also apply to current students.
Under the plans, most graduates would pay between £200 and £475 more a year in student loan repayments, according to estimates from the Higher Education Policy (HEPI) Institute think tank.
Officials are also considering reducing the interest rate paid on student loan debt – something the 2019 Tory manifesto promised to consider. That could be used by the Government to argue that some students are getting a fairer deal from the reforms.
However, the move would be complicated by the fact that Theresa May increased the threshold in 2017, arguing that it would ease the financial burden on young graduates.
Theresa May increased the threshold in 2017 CREDIT: Ian Forsyth/Getty Images Europe
Nick Hillman, the director of HEPI and a former government special adviser, broadly welcomed the attempt to reduce the student loans threshold, saying: “It would be best not to cut spending on higher education in the current crisis. But if it is deemed necessary, there are sensible ways to do it and silly ways to do it.
“Reducing the student loan repayment threshold is a reasonable idea and very much better than some alternatives like cutting student places just as the number of school leavers is rising.”
Dr Gavan Conlon, a partner at the London Economics consultancy, which has analysed the impact of the student loan rules change, found the move could save the Treasury billion of pounds.
“Although there is broad agreement that the Exchequer costs associated with higher education fees and funding have increased significantly over time and need to be reduced, the challenge is how to achieve it,” he said.
“Cutting the repayment threshold would potentially save billions, but it is the 80 per cent of middle and low income graduates that would end up paying more. The highest earning, predominantly male, graduates would be unaffected by cuts to the repayment threshold. The same is the case with extending the repayment period.
“Policies like cutting fees and removing real interest rates sound appealing and are straightforwardly understood, but all the benefit is concentrated amongst the highest earning graduates. The typical graduate is unaffected.”
A Department for Education spokesman said: “We remain committed to driving up standards and educational excellence across the further and higher education sectors so that everyone can gain the skills they need to boost their careers and boost the economy.
“As published in the Autumn Budget and Spending Review 2021, we will set out further details of the Higher Education settlement in the coming weeks.”