With a cost-of-living crisis in full swing in the UK and peer countries, students are facing increasing financial strain. This year Canada has put an indefinite freeze on student loan interest collection to help alleviate the financial pressures from housing costs, food price increases and tuition fee hikes. IF researcher, Sylvan Lutz, argues that it is time that the English government did the same.
The bills are stacking up for students
Over the past two years, the cost of living has skyrocketed across the UK. The costs of necessities have been particularly affected: rental prices increased at historic highs, at a rate of 6.2% between December 2022 and December 2023; and food prices skyrocketed throughout 2022 and into 2023. While inflation has dropped from its peak, the UK is still seeing inflation of 4.2%, which is significantly higher than peer countries such as the US and Canada and above the Bank of England’s target range of 2%. Young people, who tend to spend more of their income on essentials in the form of rent and food, are in increasingly difficult financial circumstances. It is time the English government started helping students pay for the educations that support this country’s future economic growth, not punish them for it.
The government is making life more expensive for young people
Despite the recent decision to reduce employee National Insurance Contribution rates (NICs) from 12% down to 10%, the government will still be charging young people struggling with the cost of living more taxes than they would have paid in 2021. This is because of the freeze on income tax thresholds. Even when young people receive wage raises, their real income will be lower than it would have been if the government made no changes to the tax system. In addition to these indirect tax increases, many young people face an additional ‘graduate tax.’
The student loan system is exacerbating the cost-of-living crisis
With the Plan 5 student loan system now in place for the 2023/24 cohort, graduates may be paying for their undergraduate education into their 60s. As a result, the real graduate wage premium is disappearing. Under the plan 5 loans introduced the loan will stay with graduates for up to 40 years. The government is also making life more expensive for students who started university in 2023 by reducing the student loan repayment threshold from £27,295 (for pre-2023 cohorts) to £25,000. Undergraduate loan holders then pay an additional tax of 9% (and post-graduate 6%) on any earned income above those baselines.
The debt accrues interest from the moment they start studying. This means that the principal loan continues to grow before they have a chance to start paying it off. To make matters worse, interest rates are at historic highs of 7.5% as of December 2023. Once they graduate, many students will be in a situation where even once they start paying off the loan, they are simply paying for interest payments on the loan, without paying down the principal investment.
Every year £20 billion is taken out in loans by about 1.5 million students in England. English students who started their undergraduate degree in 2022/23 are expected to graduate with a staggering average of £45,600 in debt. This estimation has slightly decreased for those starting in the current academic year to £42,900. These extraordinarily high debt levels are not widespread across peer countries and are increasing the cost-of-living crisis for young people in England.
Canada is making debt more affordable for young people
While the UK government is making life unaffordable for students and recent graduates, the Canadian government has moved to address the cost-of-living crisis head-on. The Canadian government operates a similar student loan system to support over 50% of students with the costs of post-secondary education. However, instead of straining the budgets of young people to pay for poor government decision-making, they are using changes to the student loan system to support young people through the cost-of-living crisis. The Canadian government has: increased the proportion of grants given out via Canada Student Loans and Canada Apprentice Loans; increased the real dollar value of available loans; increased the repayment threshold; and over the course of 2023, indefinitely removed interest collection on all student loans held by the federal government.
During the COVID-19 pandemic, the federal government and several provincial governments recognised that young people had been hit hardest by job losses and other negative economic impacts. This resulted in the temporary pausing of interest charges on loans under the programme. In 2023, Canadian policy-makers correctly noted that the emerging cost-of-living crisis from soaring rental prices and inflation in 2022, was again disproportionately affecting young people. This led to the indefinite removal of interest charges from current and future student loans.
Under Canada’s integrated student loan framework, a little over 50% of student loans are provided by the national government and the rest is provided by provincial governments. This means that over 50% of publicly funded student loans are now interest-free and for students that hold the rest of the loan from a province such as British Columbia, 100% of their loans are no longer accruing interest charges. All payments made by students now go directly towards paying down the principal, reducing their debt burden and ultimately helping them cope better with the cost-of-living crisis.
The changes to the student loan system are expected to save the average student loan holder 410 Canadian Dollars (CAD) per year while the cost to the government is minimal (CAD 2.7 billion over five years and CAD 556 million ongoing). The increase in the repayment threshold to CAD 40,000 will help the poorest graduates weather the cost-of-living crisis. These changes in Canada demonstrate that political will can improve conditions for young people, and that despite the current economic conditions, the English government does not need to make life more expensive for students and graduates.
Take a lesson from Canada
IF has previously argued that the UK could learn from the Canadian student loan system which offers grants and loans that did not accrue interest while students were in higher education or technical training programmes. We are again calling on the government to learn from its peers and help reduce the challenging cost-of-living crisis for young people by following Canada’s lead and eliminating interest on all student loans.
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