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Graduates will be hit by a “tax rise by stealth” after the Government announced that it intends to freeze the repayment threshold for student loans.

Currently, graduates have to start paying off their student loans when they earn £27,295 a year and this figure usually rises in line with inflation each year.

However, Michelle Donelan, the universities minister, said this will be frozen for a year, meaning graduates will “hit in the pocket” to the tune of around £150 per year.

The Institute for Fiscal Studies (IFS) said that the move “effectively constitutes a tax rise by stealth” on graduates earning middling incomes.

Paul Johnson, the director of the think tank, described it as a “six or seven per cent real-terms reduction and hence a real-terms increase in repayments of c. £150 a year on graduates with student loans”.

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.

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“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 onto 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.

Students will struggle to repay their debt

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.”

Figures published in 2019 revealed that for the first time, more than half of young people are now going to university, meaning that the pledge made by Sir Tony Blair, the former prime minister, two decades previously was finally fulfilled.

However, IFS research showed that almost eight in 10 graduates will never pay back their full student loan under the current tuition fees system.

The think tank warned that there are “major issues” with the current system, as its research showed that most graduates will still be paying off student loans into their 50s.

It found that the number of graduates who fail to clear their debt before it is written off has almost doubled since 2011, when the Government scrapped the old maintenance grants in favour of a loan system.

Michelle Donelan, the universities minister, said that the freeze will help to ensure the sustainability of the student loan system Credit: Geoff Pugh for The Telegraph

The IFS report calculated that in the long term, the Government will foot the bill for £5.9 billion per year of unpaid student loans, which are written off after 30 years.

Boris Johnson described the repayment threshold freeze as a “clear choice and change in policy” from the Treasury, adding: “The threshold was increased in each of [the] last four years, and earnings indexation was stated policy. Student ‘loans’ are treated like taxes not loans – would not let private providers change conditions like this.”

The news came as ministers prepared to publish their long-awaited response to an official review of higher education, known as the Augar review, in the coming weeks.

Led by Sir Philip Augar, the former equities broker, the review was the first one since 1963 that the Government ordered into higher and further education.

Matt Western, Labour’s shadow universities minister, said: “We have a cost-of-living crisis made in Downing Street, and whilst No 10 is in paralysis, Rishi Sunak is raising taxes on millions of people.

“Labour has a plan to help hard-working families, including cutting VAT on energy bills, saving most households £200, paid for by a windfall tax on North Sea Oil and gas producer profits.”

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