Freeze of student loan repayment threshold is a tax rise by stealth on graduates

The Government has announced the student loan repayment threshold will be frozen

This means a graduate earning £30,000 will pay £113 more towards their student loan in the next tax year.

The repayment threshold for Plan 2 student loans – the income level above which post-2012 student loan borrowers are required to make repayments – will remain at its current level of £27,295 per year for the next financial year.

The government has also confirmed that the repayment threshold for Plan 3 student loans (postgraduate loans) will remain at its current level of £21,000 per year for financial year 2022-23.

Tuition fees will continue to be frozen at £9,250, helping to deliver a fair deal to current students. This is the fifth year in succession that fee caps have remained at the same level, saving a typical full-time student finishing a course in the 2022/23 academic year over £3,000 across a three year degree.

What does this mean in practice?

Maintaining the Plan 2 and Plan 3 repayment thresholds for 2022-23 are expected to have only small impacts on individual lifetime student loan repayments. But at the same time maintaining the Plan 2 repayment threshold will save an expected £3.7bn (PSNB) over the period up to April 2025.

Individuals with Plan 2 loans who earn over £27,295 will repay up to an additional £9.45 per month.

Is my loan a Plan 2 or 3 loan?

Plan 2 student loans includes anyone who took out a student loan for an undergraduate, Level 4/5, and/or PGCE course beginning on or after 1 September 2012, as well as Advanced Learner Loan borrowers.

Plan 3 loans are postgraduate loans.

Why have DfE made this change?

Overall, the cost of higher education to the taxpayer is rising, so the government wants to ensure the student loan system is underpinned by sustainable funding arrangements so it provides value for money for both those who benefit from higher education and the taxpayer.

Higher education will continue to be open to everyone who has the ability and the ambition to benefit from it, including the most disadvantaged, and no student will have to start repaying their loan until they can afford to.

Median annual earnings for young graduates have risen from £24.5k to £28k over 2016-20, and in 2020 they typically earned £6.5K more per year than their non-graduate counterparts.

This update comes ahead of significant wider improvements to the post-18 system which will improve social mobility and help level up opportunities across the country.

This includes the introduction of the Lifelong Loan Entitlement from 2025 – which learners will be able to use to support up to 4 years of flexible post-18 study throughout their lifetime – and proposed reforms to tackle poor-quality higher education courses that offer poor job prospects for graduates.

We will drive up standards across our universities ensuring all students receive a world class education that will lead to high value, high quality and high wage jobs and are fair to graduates as well as a good return on investment for the taxpayer.

A Department for Education spokesperson said:

“It is now more crucial than ever that higher education is underpinned by a sustainable finance and funding system.

“We have today confirmed that we will maintain the Plan 2 student loan repayment threshold at £27,295 for financial year 2022-23 at current levels and that the Plan 3 student loan repayment threshold will remain at £21,000 for financial year 2022-23.

“We need to ensure the system remains fair and open to everyone who has the ability and the ambition to benefit from it.

“We’ve already made significant steps in improving the quality of higher education by tackling dropout rates and improving graduate outcomes so that students get better value for money – especially those from disadvantaged backgrounds.”

Responding to this afternoon’s (28 Jan) announcement from the Minister of State for Higher and Further Education, @MichelleDonelan on the student loan repayment threshold,

Ben Waltmann, Senior Research Economist at the Institute for Fiscal Studies said:

“Today’s announcement of a freeze in the repayment threshold on student loans effectively constitutes a tax rise by stealth on graduates with middling earnings. Graduates with the lowest earnings do not reach the repayment threshold for student loans, so they will be unaffected by the freeze. Those with the highest earnings will pay off their loans either way, so the freeze just means that they will repay their loans quicker. For a graduate earning £30,000, this announcement means that they will pay £113 more towards their student loan in the next tax year than the government had previously said. This will be a further hit to the real incomes of these graduates on top of the rising cost of living, the freeze in the personal allowance, and the hike in National Insurance rates.

“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.”

Matt Western MP, Labour’s Shadow Universities Minister, said:  

“We have a cost of living crisis made in Downing Street, and whilst No.10 is in paralysis – Rishi Sunak is raising taxes on millions of people.   “Labour has a plan to help hard-working families, including cutting VAT on energy bills, saving most households £200, paid for by a windfall tax on North Sea oil and gas producer profits.”

National Union of Students Vice-President for Higher Education Hillary Gyebi-Ababio commented:

“We were totally opposed to reducing the salary repayment threshold for student loans. We are pleased that the Government have U-turned on these plans, which would have retrospectively altered the terms of contracts which have already been signed and targeted those earning lower incomes, in the face of overwhelming student pressure.

“But the concept of a repayment threshold only exists because this Government prefer marketising higher education rather than seeing it as a public good. They should get their priorities right, stop viewing education as a product to be bought and sold for individual gain, and scrap tuition fees. Only then can we begin to build the student movement’s vision of a fully- funded, accessible, lifelong, and democratised higher education system”.

The announcement was made in a written statement from the Department for Education on 28 January 2022:

I am announcing details of the repayment threshold and interest rate thresholds that will apply to post-2012 (Plan 2) student loans, and the repayment threshold that will apply to postgraduate (Plan 3) student loans, for financial year 2022-23.

Plan 2 student loan repayment threshold

I can confirm today that I intend to bring forward regulations that will keep the repayment threshold for Plan 2 student loans – the income level above which post-2012 student loan borrowers are required to make repayments – at its current level for the financial year 2022-23. The threshold will be maintained at its financial year 2021-22 level of £27,295 per year, £2,274 a month, or £524 a week. The post-study interest rate thresholds that apply to Plan 2 loans will also be kept at their current levels in accord. For financial year 2022-23, the lower interest rate threshold will remain at £27,295 – to align with the repayment threshold – and the upper interest rate threshold will remain at £49,130.

It is now more crucial than ever that higher education is underpinned by just and sustainable finance and funding arrangements, and that the system provides value for money for all of society at a time of rising costs. 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. However, the overall cost to taxpayers of the system is rising. Since 2018, the repayment threshold for Plan 2 student loans has increased each April in line with changes in average earnings. If we do not keep the threshold at its current level. it would rise by a further 4.6% in April 2022.

Maintaining the repayment threshold at its current level, alongside the ongoing freeze in fees, will help to ensure the sustainability of the student loan system, while keeping higher education open to everyone who has the ability and the ambition to benefit from it, including the most disadvantaged.

We will also shortly set out further plans for addressing the student finance recommendations made by the Independent Panel that reported to the Review of Post-18 Education and Funding.

Postgraduate (Plan 3) student loan repayment threshold

I can also confirm today that the repayment threshold for postgraduate student loans will remain at its current level of £21,000 per year, £1,750 a month or £404 a week for financial year 2022-23.

Postgraduate loan outlay is forecast to increase in coming years, and 30% of borrowers holding a master’s loan (academic year 2020/21 entrants) are not expected to repay their loans in full. We must ensure that postgraduate loans remain sustainable and that is why we are also retaining the current repayment threshold for postgraduate loans.