Rishi Sunak scoops £5bn for tax cuts from forcing more students to pay back loans

Shake-up ‘equivalent to 9 per cent income tax rise’ delivers one quarter of chancellor’s spring statement windfall

Rishi Sunak is scooping a staggering £5bn from a shake-up that will force many more students to pay back their loans, helping to fund his tax cuts.

Last month’s overhaul of student finance – requiring graduates to start repayments with lower earnings and to pay off debts for 40 years, instead of 30 – was widely criticised as unfair.

Proposals to bring back maintenance grants for low-earning families and to slash annual tuition fees from £9,250 to £7,500 were rejected.

Poorer students will lose out, while top-earning graduates pay less, as the proportion repaying their loans in full soars from around 25 per cent to 70 per cent.

Now the Treasury watchdog’s book reveals the changes will bring in £5bn a year – accounting for more than one quarter of Mr Sunak’s higher-than-expected receipts in his spring statement.

Of the overall £19bn gain, compared with last October’s Budget, £10bn is being spent on slashing taxes, in particular hiking the national insurance threshold, with the rest used to cut borrowing.

The watchdog, the Office for Budget Responsibility, states: “The reforms amount to the equivalent of an income tax rise for most existing and new students over their working lives.”

The real-terms cut in the repayments’ threshold, combined with 40-year repayments, are “equivalent to imposing a 9 percentage point marginal income tax rise”, it says.

The student loans shake-up – a long-delayed response to a report to Theresa May three years ago – will:

* Freeze maximum fees at £9,250 a year until 2025, meaning they will not have risen for seven years – while rejecting a cut to £7,500.

* Cut the repayment threshold to £25,000 for students starting courses from September 2023 until 2027 – despite the backlash against the recently-announced freeze.

* Extend the period before loans are written off from 30 to 40 years for new students – meaning many will be nearing retirement before they are out of debt.

* Deny loans to students who fail to achieve at least two Es at A-Level or at least a Level 4 pass in English and maths at GCSE.

* Link the student loan interest rate to the – higher – RPI measure of inflation, scrapping interest for students from 2023, both during studies and after graduation.

Labour described the package – three years after the Augar report was published – as “another stealth tax for new graduates”, which would be “slamming the door on opportunity”.

The Education Policy Institute think-tank warned it would be “regressive” and threatened to hit “students from disadvantaged backgrounds”.