Plans to make graduates start repaying loans earlier

The government is planning to cut the salary threshold at which graduates begin repaying student loans. The move’s benefits are said to be twofold. Save the Treasury money; and motivate 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, according to the Financial Times.

Currently, graduates start to pay back student loans when their salary hits £27,295, but ministers are looking to reduce that figure.

Relevant Figures

The Augar review of post-18 education in 2019 recommended the threshold be lowered to £23,000. This year, the Higher Education Policy Institute think-tank wants to lower it to less than £20,000.

FT reported that decisions have not been finalized, but one minister said a £20,000 threshold was “a bit low”.

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

Whitehall officials said the proposal to lower salary threshold would incentivise the government’s plans to revolutionise technical and vocational training in the UK, a key part of Boris Johnson’s levelling up agenda.

Downfalls & Alternatives

Cutting the salary threshold would mean millions of graduates would be hit with an effective 50 per cent levy. 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. That is repaid with additional interest through a 9 per cent cut of earnings and written off after 30 years. (Zolpidem)

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.

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.

Source: Financial Times