The government has frozen the salary threshold at which graduates start repaying their student loans, which has reduced take-home pay for university leavers in England from April.
The Institute for Fiscal Studies, a think tank, described the move as a “stealth tax hike” that would let graduates earn £30,000 with an additional £113 annual refund.
Higher Education Minister Michelle Donelan said on Friday the salary threshold for loan repayment would remain at £27,295 for the next tax year instead of rising by 4.6% in line with average earnings , as is current policy.
The government, which is facing growing criticism over its handling of the cost of living crisis, had previously considered lowering the threshold that applies to graduates who took out loans from 2012.
“Today’s announcement of a student loan repayment threshold freeze is actually a stealth tax hike on middle-income graduates,” said Ben Waltmann, senior research economist at IFS. . “It will be an additional hit to the real earnings of these graduates on top of the rising cost of living.”
Donelan, who previously announced that annual university tuition fees would remain at £9,250, said the government had imposed the freeze as the “overall cost” of higher education to taxpayers rose.
She said the combination of the repayment threshold and the fee freeze “would help ensure the sustainability of the student loan system, while keeping higher education open to all who have the capacity and ambition to benefit from it. “.
The move came after months of intense wrangling between Downing Street and the Treasury. A senior Whitehall official has said Chancellor Rishi Sunak is “absolutely committed” to reducing the cost of funding three-year degrees, despite Number 10’s opposition to anything that could be construed as a tax hike.
Matt Western, Labour’s shadow universities minister, condemned the decision. “We have a cost of living crisis in Downing Street, and while Number 10 is paralyzed, Rishi Sunak is raising taxes on millions of people.”
Boris Johnson, who is struggling for political survival in the face of lockdown parties, is also coming under pressure from his party’s right wing to delay a National Insurance increase in April. “No 10 desperately wanted to avoid being seen to impose fees or taxes of any kind,” an insider said.
Another Downing Street insider described the decision to freeze the threshold as a “massive meltdown” for Sunak and the Treasury, pointing out that it amounted to a real-term reduction in take-home pay for graduates.
The National Union of Students said that while it was ‘pleased’ the government had ‘turned a U-turn’ on plans to lower the threshold, tuition fees should be scrapped.
Nick Hillman, director of the Higher Education Policy Institute, a think tank, said the decision was “reasonable” because the existing system had left the taxpayer with a heavier burden than originally expected.
Waltmann said if the freeze becomes permanent, it “could transform the student loan system, with a much lower cost to the taxpayer and a much greater burden on graduates.”
Donelan said the government would “shortly” draw up new plans on the future of university funding.