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We need to overhaul student finance – not burden graduates with a stealth tax

We need to overhaul student finance – not burden graduates with a stealth tax
4 min read

Last week ministers found a new way to shift a financial burden – this time from the Treasury’s balance sheet to graduates’ pockets.

The government has chosen to freeze the salary threshold for student loan repayments at £27,295, over which graduates pay 9 per cent of their salary. This threshold is around £4,000 less than the national median salary (according to the ONS) of £31,285.

This threshold has risen with inflation each year since being reset by Theresa May in 2017 – and will be frozen just as inflation hits a new high. The change will have most impact on low and middle earners, already hit by increases in energy bills, national insurance, food and other essentials.

A graduate earning £30,000 will pay £113 more per year towards their student loan in the next tax year – as well as £255 extra in National Insurance. The IFS are right to brand this threshold freeze a stealth tax. The only marginal winners are those wealthy graduates who repay in full and will do so earlier.

Further transfer of debt from the Treasury to low-earning graduates would be unacceptable

The move does show the Treasury’s concerns over the rising cost of the loan scheme, which is failing to live up to the promises made when the new system was introduced in 2012. Ministers at the time expected the RAB charge (the estimated cost to government of borrowing to support the student finance system) to be approximately 30 per cent. Back then I argued that this was unrealistic, as did others across the sector. After steadily rising over the last decade, the RAB charge is now 53 per cent.

There are underlying problems with the system, which is not keeping pace with rising student costs – particularly on accommodation which has risen by 60 per cent over the decade. Student finance needs an overhaul, which is what Philip Augar was commissioned to do by the government in February 2018. Our APPG arranged for him to meet with students at the start and end of his review. He won their respect for his approach to the issue but, almost three years after his report was published, we are still waiting for the government’s response.

There is not universal agreement with the recommendations of the Augar Review, but it provides a platform for a discussion we need. However, when the government do respond, they should take care not to make the system worse.

Further transfer of debt from the Treasury to low-earning graduates, through either lowering the repayment threshold or extending the repayment term, would be unacceptable. So would an unfunded cut in undergraduate tuition fees, as some have suggested the government might be considering.

Augar’s recommendation to cut fees to £7,500 was on the basis that lost funds to universities would be matched by extra teaching grants. Writing to MPs last week, the higher education minister rightly said that we “can be justly proud of our university system, which is world class”. An unfunded cut would hit the quality of provision and undermine efforts on widening participation.

A fees cut won’t help students either. As four in five graduates - those with lower incomes - don’t repay their loans in full, reducing their notional debt won’t affect the total sum they pay back. Only the best paid will save money. But the real winner would be the Treasury as the overall debt falls – and with it the RAB charge.

So, let’s have a real debate on higher education funding and the rising cost facing students. We can look at all the options - including different systems – but not risk our world-leading higher education sector, or the futures of our brilliant students, who deserve a fair system of contributions as they start their careers.

 

Paul Blomfield is the Labour MP for Sheffield Central and chair of the APPG for Students.

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