ECONOMY

No 10 plans to lower salary level at which graduates start repaying loans

UK universities updates

The government is planning to cut the earnings threshold at which graduates begin repaying student loans in a bid to save the Treasury money and push more young people towards cheaper vocational education.

Chancellor Rishi Sunak wants to overhaul student financing in his spending review ahead of next month’s Budget, reflecting Treasury concerns that the taxpayer is footing too great a burden of funding university courses.

Currently graduates start to pay back student loans when their salary hits £27,295, but ministers are looking to reduce that figure. “That’s the plan,” said one minister.

The Augar review of post-18 education in 2019 recommended the threshold be lowered to £23,000, median non-graduate earnings at the time, and the Higher Education Policy Institute think-tank this year modelled a cut to less than £20,000.

No final decisions on the new level have been taken, but one minister said a £20,000 threshold was considered to be “a bit low”.

A figure of £23,000 could save the Treasury just under £2bn a year, according to the Institute for Fiscal Studies, a think-tank, while a graduate earning the current threshold would have their take-home pay cut by more than £800 annually.

The Department for Education said the student loan system was “designed to ensure all those with the talent and desire to attend higher education are able to do so, whilst ensuring that the cost of higher education is fairly distributed between graduates and the taxpayer”.

It also said it was continuing to consider “the recommendations made by the Augar panel carefully”. Augar also recommended cutting the cap on annual tuition fees from £9,250 to £7,500 — such a cut would be welcomed by students.

Whitehall officials said the proposal to cut the salary threshold for repaying loans would give a boost to the government’s plans to revolutionise technical and vocational training in the UK, a key part of Boris Johnson’s levelling up agenda.

The government believes too many students are racking up debts studying “soft” three-year university courses in arts and social sciences, and is looking to funnel more 18 year olds towards technical training that is cheaper and will pay a faster economic dividend.

Gillian Keegan, the former skills minister, said before this month’s ministerial reshuffle that the skills focus sought to reassess university as the “default option” for post-18 study. “We want people to think about their options — it’s a big investment decision,” she said.

But cutting the salary threshold would mean millions of new and existing graduates would be hit with an effective 50 per cent levy on additional earnings in some of the lowest salary bands, increasing pressure on young people after national insurance contributions were increased this month.

Henry Parkes, a senior economist at the Institute for Public Policy Research, said lowering the threshold would be “virtually indistinguishable from a tax rise targeted at young workers alone”.

The National Union of Students, said it would be “totally opposed” to any reduction. “The injustice is simply astounding,” said Hillary Gyebi-Ababio, vice-president for higher education.

In England, the average debt on graduation is more than £45,000 in maintenance and tuition loans from the government, which are repaid with additional interest through a 9 per cent cut of earnings and written off after 30 years.

The government estimates 54 per cent of the money it lends will never be paid back, and it is eager to reduce this so-called RAB (resource accounting and budgeting) charge, which determines the proportion of the government’s loan book to be written off.

David Willetts, who as universities minister in the 2010-2015 coalition government introduced £9,000 tuition fees from 2012, is among those who support the idea. “I think the RAB charge is too high and I think they should lower the threshold so that graduates repay more.”

But forcing graduates to start repaying earlier, which would more than reverse Theresa May’s 2018 decision to increase the threshold, has emerged as a preferred measure, potentially alongside others.

HEPI director Nick Hillman said the option was better than alternatives, bringing “very significant” savings “without seriously harming on-the-ground services”.

Ben Waltmann, an IFS economist, said the government could alternatively raise money by increasing the repayment period, allowing graduates to pay more in later life.

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