Will Labour U-turn on student loans?
Kemi Badenoch has done something sensible: she has taken up the cause of university graduates. As I’ve noted for years, the student loan system imposes marginal tax rates that politicians struggle to justify: 37 per cent on incomes over £25,000, 51 per cent on £50,270 and 71 per cent on £100,000 (plus interest and an extra 6 per cent for postgrads).
The Tories’ main proposal is to scrap interest rates of up to 6.2 per cent on Plan 2 Student Loans, ensuring that balances never rise faster than RPI inflation. This would end a system that means graduates have to earn more than £66,000 a year before they even begin to reduce their debt. It would be funded by cutting university places by 100,000 (a perennial idea that politicians, you’ll note, rarely think should apply to their children).
There have been two main critiques of the student loan policy. The first, made by Martin Lewis yesterday, is that the move would benefit higher-earning graduates the most (or those who will clear the debt within 30 years). It would be more redistributive, he noted, to raise the Plan 2 repayment threshold, which Rachel Reeves intends to freeze at £29,385 for three years. This is true, but it’s also true that high-earning graduates are a group that the Tories need to do far better by if they want a political future.
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The second, made by Labour, is that it was the Tories who introduced this system in government alongside the Lib Dems. It’s an important point but not one that answers the political challenge. Frankly, “we got it wrong” are words that Badenoch should have been saying far more often since becoming Tory leader, though this self-critical spirit is better now than never. “You can’t continue to defend a system that’s so broken even its architects want to change it,” concludes one millennial Labour MP of the government’s position.
Badenoch has given Keir Starmer and Reeves a chance to right their wrongs. The problem with the unanticipated threshold freeze is that this isn’t only a fiscal question but a moral one. When George Osborne adopted the same policy in 2015, Wes Streeting, a former NUS president, responded: “How can students now trust anything the government says about student loans they sign up to? If banks did this to customers, there would be an enormous outcry. This change will hit hardest those graduates on low and middle incomes close to the earnings threshold.”
That argument is as persuasive now as it was then. (Streeting has gone further than his cabinet colleagues by calling for a “national debate” on the student loan system.) A wise move would be to abolish the threshold freeze and launch a review of the finance model. Cabinet ministers are now defending the student loan system as a form of de facto taxation that helps fund the NHS and other public services.
Is this fair? Some will argue that it is – the “graduate premium”, in common with UK living standards in general, has wilted but still exists. But far better to make this argument from first principles than as a last resort.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[Further reading: The OBR is throttling Britain’s economy]
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