Inflation Student loan

Inflation and the Postgraduate Master’s Loan

The maximum English Postgraduate Master’s Loan available has risen steadily since it was launched in 2016 but that hasn’t been enough to stop its real terms value being eroded by inflation since the pandemic.

The maximum loan for postgraduate students starting in 23/24 is currently worth £9,293 in October 2016 terms, a decline of 7% from its initial £10,000 value.

Student loan

A 23k repayment threshold?

As the FT reported on Monday (paywall), the government is said to be considering lowering the student loan repayment threshold to £23,000, down significantly from a little over £27,000 as it currently stands. It remains to be seen if, in the event that this comes to pass, the government attempts to apply these changes retrospectively to those already holding Plan 2 loans or settles for establishing these new terms for new graduates or new students, perhaps alongside other headline grabbing changes to HE funding recommended by the Augar Review.

If the threshold is lowered to this figure however then those subject to it will feel the impact on their take home pay particularly strongly in the next tax year thanks to it coinciding with the previously announced rise in national insurance rates (see here for our previous work on this topic).

The two changes together would shave around £640 a year off the take home pay of a graduate earning £30,000, or around £53 a month, compared to the current tax year.

Assuming a standard 5% auto enrolment pension, our graduate on £30,000 would go from taking home 76.2% of their gross pay to taking home 74.1% of it.

With high inflation already eroding living standards any move to extract further bonuses for the Treasury from young workers would no doubt prompt future school leavers, especially those from the most disadvantaged backgrounds, to reconsider if higher education is worth the price.

Student loan

The cost of a student loan

This week saw the announcement of a 1.25% increase in the main and higher employee class 1 national insurance contribution rates. Whilst student loans and national insurance don’t impact upon each other this is a good opportunity to review what the total burden of tax (and pensions) on graduates will be in 2022/23 and how this will differ from those without student loans to repay.

In the below we compare Plan 2 student loan holders with those without student loans and assume the following:

  • That both contribute 5% of their salary into a standard auto enrolment pension
  • That student loan repayment thresholds rise next year in line with recent historical precedent
  • That the employee class 1 national insurance contribution threshold remains unchanged at £9,568

We can see the divergence begin between our two individuals as they pass the Plan 2 repayment threshold at approx. £28,000 and widen from here on out.

Gross annual payTake home annual pay – no student loanTake home annual pay – Plan 2 student loan

If we plot take home pay as a percentage of gross pay we can see the proportional burden of tax, student loan and pension on our two individuals.

Gross annual payTake home % – no student loanTake home % – Plan 2 student loan

As ever larger segments of the young working age population find themselves burdened by student loans repayments it is essential that these student loans are included in discussions about changes to tax structures, or else we risk badly misjudging the impact of such changes on graduates.