Student Loan Income Threshold Frozen

The income threshold for repayment of student loans in England & Wales has been frozen for the coming tax year

On 28 January, the Department for Education slipped out an announcement that the student loan repayment threshold for 2022/23 would ‘remain at its current level’, i.e. be frozen at £27,295. This latest variation on the theme of fiscal drag applies to Plan 2 loans, those taken out in England & Wales for courses starting from September 2012 onwards.

The threshold should have risen in line with earnings growth, a pledge given by Theresa May in 2017. The increase, based on earnings growth to March 2021, would have been 4.6%, a rise of £1,255 to £28,550. The consequences of this freeze are:

• An ex-student earning over £28,550 will be paying £113 more (£1,255 @ 9%) than would have been the case had the limit been revalued.

• Even if revaluation is reintroduced in 2023, the Treasury will continue to benefit in future years because any uplift is to a lower base. Over the three years to April 2025 the Exchequer will gain £3.7bn.

• As the non-change starts in April 2022, it means ex-students who are employees will face a marginal rate on earnings over £27,295 of at least 42.25% (20% income tax + 13.25% NICs + 9% student loan payment). Add on auto-enrolment at 4% net and the total exceeds the additional rate of income tax.

• Higher earners who pay off their student loans before the 30-year cut off point will now end up clearing their loans sooner and thus paying less in interest.

• For others who do not repay in full – estimated to be 75% of current undergraduates – nearly all will be paying more every year until the cut-off point arrives.

Alongside the earnings threshold freeze, the interest rate thresholds will remain unchanged at £27,295 (RPI + 0%) and £49,130 (RPI + 3.0%) respectively. The tuition fee cap will also be frozen at £9,250, the level that was first set in 2017/18.

Coming down the line is a potentially bigger student loan issue, the interest rate to be charged from 1 September 2022. In theory this will be based on the Retail Price Index (RPI) inflation to March 2022. The December 2021 RPI was 7.5%. And, even if the RPI reading is unchanged from the December figure, when March 2022 arrives, RPI annual inflation will still be 7.0%. That is because prices rose by just 0.5% on the RPI basis in the first three months of 2021.

In 2020, the Government temporarily cut the maximum rate charged to RPI + 2.7%, which produced a ceiling of 5.3%. That restriction ended from 1 October 2021, meaning that the current maximum interest rate is 4.5% (March 2021 RPI was 1.5%). Raising the interest rate in line with the March 2022 RPI rate will make virtually no difference to what flows into the Treasury’s coffers in the short term. In the longer term it will increase the amount of debt that has to be written off unless there is a corresponding jump in graduate salaries, which looks unlikely.

The one consolation for anyone with a Plan 2 student loan is that it could have been worse. Last year there was talk of lowering the income threshold, perhaps to the £23,000 proposed in the Augur review.

The rising cost of student debt, coupled with the potential for online only lessons and the rise of apprenticeships could see a drastic reduction in university applications over the next generation.