Graduates are being hit with a ‘tax rise by stealth’ on their student loan – but what does it actually mean?

Millions of graduates face higher repayments on their student loans next year after the government announced a “tax rise by stealth” that will cost many £100 or more a year.

In a written statement on Friday, education minister Michelle Donelan announced the salary threshold for student loan repayments in England will be frozen at the current levels of £27,295 per year, £2,274 a month or £524 a week for 2022-23.

But Paul Johnson, director of the Institute for Fiscal Studies (IFS), said the moves equates to a real-terms £150 increase in the amount students with loans will have to repay each year.

The (IFS) thinktank said the move would save the government about £600m if it stayed in place for a year, but if extended the freeze would place a much higher financial burden on graduates.

The freeze, which will affect everyone who took out a student loan from 2012 onwards, will come into force in April – hitting graduates at the same time as the planned National Insurance rise, the freeze in the personal allowance, and a rise in energy prices.

“Some graduates will rightly feel hard done by,” said Nick Hillman, the director of the Higher Education Policy Institute.

“They will be disappointed as they will think they are taking on an unfair proportion of the tax burden. Things like the National Insurance increase doesn’t hit pensioners and this change does not hit pensioners.

“Young graduates are particularly hard-pressed. They are struggling to get on to the property ladder. Although strictly this is a loan repayment, not a tax, it feels like a tax as it is coming out of your salary at source and it affects your take-home pay.”

The IFS said that the freeze would allow the Treasury to recoup about £600 million for each cohort of university students. However, it added that if it stays in place for longer, it could “transform” the student loan system to one with a far higher burden on graduates and a lower cost to the Treasury.

Whitehall officials are concerned at the cost to the taxpayer of the increasing number of pupils who take up a place at university, but fail to earn enough to pay back their student loan.

The move will not affect graduates in poorly paid jobs since anyone earning less than £27,295 a year does not meet the threshold to start paying back their student loans.

For graduates who earn a high salary and are on track to repay their full student loan either way, it will mean they will pay it back quicker.

Explaining the rationale for the freeze in a written ministerial statement, Ms Donelan said: “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.

“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.”

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