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How the Spring Statement affects students

Spring Statement ushers in significant changes for student finance repayments

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Image Credit: Pippa Fowles

On 23 March, Chancellor Rishi Sunak delivered the Spring Statement which outlined the overall health of the UK economy and listed measures designed to boost economic growth, consolidate government finances and tackle the cost of living crisis. The measures announced in the statement include significant changes to the ways in which students finance their degrees and cope with their debt once they leave higher education. Though this runs the risk of hyperbole, it is difficult to overstate the fact that many students and recent graduates are going to go through a long period of financial difficulty.

This article will break down the main policies from the statement that concern students and recent graduates, and the impact they will have.

The headline policy is the reduction of the student loan repayment threshold. Under the current system, graduates start paying back their loan once they earn more than £27,295, with any income earned above this figure being taxed at 9 percent. The new measure reduces the threshold to £25,000. A graduate on a starting salary that would not have met the old threshold but meets the new one will now pay £206 on that year’s income that they wouldn’t have had to before. In reducing the threshold, higher earners benefit in that they immediately start paying back more and are able to pay back the loan sooner. The difficulty is that middle and lower earners, who are disproportionately represented in industries like media and the creative arts, won’t be able to pay back their loans as quickly, resulting in  increasing amounts of interest on top of their original loan.

The rationale behind this is obvious for the Treasury. Currently, around a quarter of all graduates repay their student loan back in full before the debt is wiped out after a 30 year period, with this cost being borne by the government. Given the pressures on public finances, the move to reduce the threshold will see more students paying back their loans much sooner after they graduate. Furthermore, the window in which students can repay their loans has been extended to 40 years. Essentially, loan repayments are a kind of graduate tax that now will see lower and middle earning graduates taxed for the overwhelming bulk of their professional lives.

This is projected to save the government around £35 billion over the next six years, which should enable it to fund its income tax cuts, reduce the fuel duty by 5p, and provide relief for energy price rises and council tax rebates with the earmarked £12 billion. On this basis, the Intergenerational Foundation has said that the “government is cynically taking from the young tomorrow to pay for giveaways today.”

Regarding the loan repayments, the reduction in interest rates appears to at least be a silver lining. Currently, it is linked to the Retail Price Index (a measure of national inflation that this month runs at 8 percent) plus an additional 3 percent. After the Statement, loan interest rates will equal the Retail Price Index. However, this should be understood within the context of national interest rates set by the Bank of England running at 0.75 percent, confirming that student borrowers still suffer from staggering unfairness when compared to those across the national population. What’s more, this is coupled with a freeze on the tuition fee ceiling until 2024-5.

Given the aforementioned changes, the tuition fee freeze and interest rate change will have no material effect on students. Although the freeze and rate change will reduce the total amount of money accrued by students, the fact that students will be paying it from a lower threshold and over a long period means students will pay a larger share of that debt than they would have done otherwise under the old measures.

The Office for Budget Responsibility described these changes as “the largest fiscal takeaway” of the Statement and that it amounted to an “income tax rise for most existing and new students over their working lives.”

One of the key issues Sunak tried to address in the statement is the cost of living crisis. Students in York will have seen increases in rent, energy bills, and food shopping costs. It cannot be overstated that for the poorest in our society, the next year will be extremely difficult and it’s been reported that up to 1.6 million people could be pushed into relative poverty in the UK, including 500,000 children.

Very recent research from the National Union of Students has shown that one in four students have less than £50 a month after paying rent and energy bills, with two in three students having sought financial help, with 5 percent of that group using food banks. The various measures introduced by the Chancellor to offset rising costs do not have any bearing on students. The council tax rebate does not apply as students are exempt from that tax. The raising of the threshold after which you pay national insurance also fails to affect students as the overwhelming bulk do not earn more than the new threshold of £12,570. The fuel duty cut is also irrelevant given that most students don’t run a car at university.

The National Union of Students stated: “this was a moment where students desperately needed a lifeline from this Government; instead this is a nail in the coffin.” The Spring Statement certainly made for difficult reading for students and graduates given the immediate pressures of rent, energy and food price rises they face. It will also have profound consequences on how our loans, taken out at age 18, will affect many of us for the majority of our professional lives.

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