Michelle Donelan hopes you won’t notice her stealth tax rise for graduates

Further and Higher Education Minister Michelle Donelan has announced a freeze to the repayment threshold for student loans.

Jim is an Associate Editor at Wonkhe

Slipped out quietly in a Parliamentary statement on Friday afternoon, Donelan announced that the threshold for “Plan 2” (ie post-2012) loans will stay at £27,295. It was supposed to rise by average earnings of 4.6 percent to around £28,550 from April.

For a graduate earning £30,000, the announcement means that they will pay £113 more in loan repayments in the next tax year than the government had previously promised.

The repayment threshold on “Plan 3” postgraduate loans will also remain at £21,000 per year, and also represents a real terms reduction – that’s a roughly £90pa hit, so it’s about £200 for those who have both a Plan 2 and Plan 3 loan.

It might not sound like much, but we do have to think about that 50 percent hike in energy bills that’s coming in April. Instead of helping those graduates, the government will raise taxes on them.

Donelan’s statement sets out the frame for the announcement – “just and sustainable” finance and funding arrangements, and a need to ensure that the system provides value for money “for all of society” at a time of rising costs.

It’s a stretch, but the line here (repeated on Radio 4’s Any Questions on Friday night) is that it’s not fair for taxpayers to have to shoulder the full burden of rising costs of the loan scheme, so we’re making graduate taxpayers shoulder more than we promised.

Donelan used the same appearance on AQ to (again) argue that providers breaking promises to students over provision should issue refunds – brassily finger wagging at universities in the same breath as breaking her own government’s promise to uprate the threshold by earnings.

We were told that upset students last year got £1m in refunds – hastily revised to £700 when we assume Donelan meant £700k – which is one of those “sound like a lot” things but isn’t when you remember that tuition fee income these days is over £20bn a year. And the saving to the Treasury from the threshold freeze? IFS puts it at £600m.

(Mickey Mouse got a fresh airing on AQ by the way – confirming that the phrase has now moved officially from articles in the Mail and the Telegraph to the vernacular of actual ministers – as well as that infernal magic money twig.)

The announcement officially marks a first formal break in policy on loans since Theresa May’s “British Dream” – in the speech where she launched the Augar review, she also raised the repayment threshold to £25,000 and announced it would be annually uprated by earnings, “putting money back into the pockets of graduates with high levels of debt”.

As such, the Institute for Fiscal Studies (IFS) says that the announcement effectively constitutes a tax rise by stealth on graduates with middling earnings.

At the two extremes those on the lowest earnings don’t reach the threshold, and those with the highest earnings pay off their loans either way, and the freeze just means that they will repay their loans quicker. For everyone else, this is a hit to the real incomes of graduates that comes on top of the rising cost of living, the freeze in the personal allowance, and the hike in National Insurance rates.

And as IFS points out:

What really matters is how long this threshold freeze will stay in place. If it is only for one year, the impact on graduates will be moderate, and the government can only expect to save around £600 million per cohort of university students. If it stays in place for longer, it could transform the student loan system, with a much lower cost for the taxpayer and a much higher burden on graduates than they thought they had signed up for when they took out their loans.”

Martin Lewis has a reaction up, and takes the “broken promises” line that he used when the government initially proposed breaking the promise to uprate by earnings in the middle of the last decade.

In the statement to Parliament, Donelan does that thing that politicians tend to do with this hybrid tax-loan scheme – one minute she’s framing it as a tax so as to justify being able to “adjust” the balance between state and individual contributions, the next she’s pretending that the overall debt level matters when most don’t pay off after 30 years:

This government has already confirmed that we will freeze maximum tuition fee caps again for the 2022/23 academic year, the fifth year in succession that we have held fee caps at current levels. The ongoing fee freeze is reducing the burden of debt on students and is helping to make higher education more affordable for them.”

In truth, there’s only a small group for whom that “more affordable” statement is true – the highest earners. Most students will pay over £3k more over their lifetimes – quite the kick in the teeth for those who already felt that their experience over the past three years thanks to strikes and Covid last been less than optimal.

And the “we’ve frozen fees” line is just as disingenuous for the same reasons – the only impact on most students will be that there’s less money each year to spend on their education, while the total they will pay will increase. Charming.

We had, of course, been expecting an announcement on the threshold – the annual Student Loans Company statement last August on interest rates mysteriously said that thresholds from April 2022 “will be announced in due course”, despite the uprating for earnings supposedly being automatic in the regulations.

Obviously the assumption at the time was that the response to Augar would be with us by now, and that some of its “rebalancing” could start to be implemented this April – but with the response to the review still stuck behind the levelling up white paper and partygate, something had to be announced.

One way to think about the freeze is to regard it as a move that takes the wind out of the sails of more dramatic options that were on the table last year. By the time we get to April 2023, a more noticeable actual reduction to the threshold – a significant tax hike for the young – will not be a comfortable thing to announce so close to an election.

The trouble is, you can also read the announcement as a bit of pitch-rolling – if little fuss is caused over this when backbenchers are already restless over the coming NI hike, it will give confidence to ministers that they can go further with these frames if they ever get to announce the Augar response.

You might reasonably ask why what amounts to a tax rise is announceable outside of the budget and not by Rishi Sunak – but as the DfE settlement has been set already in the spending review, and demand on places continues to grow, this is likely about DfE reducing the trouble it will be in with Treasury officials when that demand turns into loan uptake.

One interesting aspect of it all is the legislative underpinning to it all. The Education (Student Loans) (Repayment) (Amendment) Regulations 2018 introduced the rise in the threshold from 21 to 25k, and the annual uprating for earnings and shouldn’t be especially difficult to amend.

But in theory, the change should be co-signed by Donelan’s counterpart in Wales – the thresholds for Plan 2 and Plan 3 apply across the Severn Bridge, and while Kirsty Williams was pleased that Sam Gyimah was moving the threshold up in 2018, you would have to assume that current minister Jeremy Miles won’t be as thrilled, particularly as the Labour shadow in England has already condemned the rise in the context of rising bills and cost of living.

It’s not clear how easy it would be for Miles to resist the threshold raising or go his own course – presumably it’s not just about the relevant powers being devolved to the Senedd but also about simplicity for students, simplicity for the SLC/HMRC and crucially budget consequentials. Did Miles know about the announcement before today? Was Wales involved in the discussion? What does he think now? Perhaps that will all emerge in coming days.

Meanwhile in Canada, Trudeau is raising the graduate repayment threshold and maintaining the doubling of grants seen during Covid, as well as giving parents a complete holiday on repayment while they have children under the age of 5, and removing all interest from student loans. Other political choices, different post-Pandemic frames and alternative groups of people to please are always available.

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