The new Education Secretary has signalled plans to overhaul the student loan system to cut graduates’ cost of living – opening the door to another multi-billion-pound spending commitment.
In an interview on Monday, Lucy Powell indicated ministers were considering changes to both the repayment threshold and the interest rate on Plan 2 loans.
Interest is charged on plan two loans at the rate of Retail Prices Index (RPI) inflation and up to 3 per cent depending on how much a graduate earns, with repayments starting when they earn a salary of £29,385.
Powell described the current interest charge as “egregious” and said that the scandal was “very much at the top of my in tray”.
She is expected to set out the Government’s response in the Autumn to the Treasury Select Committee’s recommendation that ministers reverse the freeze on the Plan 2 student loan repayment threshold. The cross-party committee of MPs said earlier this month that ministers had a “moral obligation” to act at the next Budget.
Plan 2 loans cover students who began undergraduate courses in England between 2012 and 2023. The current repayment threshold is due to be frozen in cash terms from 2027 to 2030 – meaning more graduates will repay a larger share of their earnings over time as wages rise.
The soaring cost of student debt has become a touchstone political issue for thousands who are on the controversial repayment plan, which has left some graduates in England and Wales paying tens of thousands of pounds more than they originally borrowed.
But those hoping for Andy Burnham’s new Government to both reverse the freeze and cut interest rates may find themselves disappointed.
Reversing the freeze would cost the Exchequer billions of pounds alone over the coming years. One estimate put it as high as £6bn.
Separately, the Institute for Fiscal Studies (IFS) estimated that reducing Plan 2 student loan interest rates to RPI only would cost £4bn if applied to the 2022/23 entry cohort alone.
Burnham is likely to face difficult trade-offs in trying to fund all of his priorities, with measures such as providing relief for graduates with student debt, increasing defence spending, and reforming social care all carrying significant costs that would require either higher taxes, increased borrowing, or spending cuts elsewhere.
Giving the strongest hint yet about how the Government would respond to the Plan 2 scandal, Powell told BBC Radio 5 Live’s Matt Chorley: “I think it’s not just about the threshold of when people start to pay it back, but also the interest rate, which is 3 per cent plus RPI…which is, I think I’ve called in the past, egregious. And I am not going to sort of change my opinion on that just because I am now the Secretary of State.”
She added: “It is in my, very much at the top of my in tray as the Secretary Of State and you know I want to make sure that we look at this so that it’s fair for students and it’s a real cost of living issue for young people because there’s about a 10 year sort of time frame of people on this plan… So, they’re paying high repayments and never ever paying off the capital of their student loan.”
Pressed on whether it is something she is going to address, she added: “I can’t make any promises nut it needs looking at.”
Shadow Education Secretary Laura Trott said the Education Secretary was right to describe Plan 2 student loans as “egregious” and offered to “work with her” on reform, arguing the Conservatives had a fully funded plan to cut interest rates on Plan 2 loans to RPI only, paid for by ending funding for “dead-end” degrees and expanding apprenticeships.
The i Paper previously revealed Burnham was being urged by his allies to increase the salary threshold for student loan repayments.
To help address the graduate debt crisis, the Good Growth Foundation, which campaigns for a fairer economy, proposes an immediate uplift in the repayment threshold from £29,385 to £33,542 and an annual increase, linked to median graduate earnings growth, enshrined in law. It argues this would restore the real value of the £25,000 threshold set in 2018 and reverse recent threshold freezes.
The changes would save a graduate earning more than £33,542 around £374 a year, according to The i Paper’s estimates.
Among those backing the proposals was Alex Sobel, co-chair of the cross-party group of MPs and peers on students, who told this newspaper it was a “promising alternative to the status quo.”
Josh Dean, Labour MP for Hertford and Stortford, also backed it as “sensible, long-overdue reform”. He said rising repayments were eating into young people’s pay “just as they are trying to build a life, start a family or put down roots.”
Raising the repayment threshold has a much greater impact on low to middle-earners because it would immediately reduce their monthly payments.
A cut to the interest rate would be of most benefit to higher earners who are more likely to clear their loans.
The high interest accrued on student loans does not affect monthly payments, but it does mean that some graduates see their balances grow despite making regular contributions. Most graduates are projected not to clear their loans before they are wiped after 30 years as a result of the high interest rates.
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