Student loans and frozen payment thresholds - are they a tax?

Hello and welcome back to The Student Eye, a publication for university students and those interested in higher education across the UK.

This week, we bring you an explainer on student loan repayment thresholds and why they have been across news networks this week.

We hope you enjoy this week’s edition of The Student Eye, and please share with anyone who may be interested!

Student loans have been back in the news again this week. Spearheaded by Martin Lewis, many commentators have been taking to the airwaves to explain why they believe Rachel Reeves has made “unfair” decisions on loan repayment.

In an extremely complex system, the basics of the developments are fairly simple. Chancellor Rachel Reeves has said that she will freeze the salary level at which students will have to start repaying their student loan. That will remain at £29,385 until April 2027, for all ‘Plan 2’ (post-2012) loans.

Opponents are pretty clear on why the system is, to them, unfair. The interest on student loans is RPI, plus an extra 3%, making it very challenging to pay off. After graduating, that interest rate also varies by salary, meaning that you pay a different amount depending on what you earn. Fiscal drag means that more people will now be paying back their loans.

It is worth noting that the decision to freeze the thresholds was announced last year, it is not new.

Lewis Goodall has been another arguing the case this week. He pointed out on LBC that within certain bands, 9% interest would hit higher earners less hard than lower earners. That is, clearly, exacerbated by the threshold freeze and Goodall argues that it means that those who benefit the least from university are paying a high proportionate cost.

Critics also point out that because lower earners pay off their loans more slowly, they eventually end up paying more in total.

These changes are also controversial because they have happened to students who have already taken out their loans. Martin Lewis argued on Newsnight this week that that should not be allowed and that changes should only affect future loanees.

This is complicated because student loans are not a tax. Although many economists include them “marginal tax rates”, they are actually loan “contracts” between the government and students. Unlike regulated loans though, such as the ones you might withdraw from a bank, the government has the power to change the terms of the deal mid way through the “contract”.

As we have covered before, student loans and maintenance loans are rarely enough to cover the full cost of university anyway, meaning that those from a higher socio-economic background already gain a significant advantage.

Eduction Secretary Bridget Phillipson has said that she will re-introduce maintenance grants for some students in specific subjects.

Reeves says that the system is “fair”. She told LBC that “It’s not right that people who don’t go to university” have to pay “the cost for others to do so”. She pointed out that if you are not able to ever repay the loan, it “will eventually be written off”. That happens after thirty years.

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By Oliver Hall

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