The graduate tax masquerading as student loans

Two students with mortar boards © Getty images
New graduates can look forward to a life of debt

My favourite story in the weekend press this week came from Rebecca Myers in The Sunday Times. She graduated last year from Warwick University with £25,262 in debt – and has started to think about when she might be free of that debt. The answer, according to the online calculators she has looked at, is in 22 years (March 2038), at which point she is intending to hold a “debt-free party”.

It’s a nice idea. But she’ll be very lucky if it goes to plan. Student debt is a nasty business. You can borrow up to £51,600 while you study. That sounds nice. But it comes at a cost: a sliding scale of RPI (retail price index) plus up to three percentage points (why not consumer price index (CPI)? See my blog on the matter here). That makes today’s interest rate 4.6% – and it starts clocking up immediately.

So until you graduate – or start earning over £21,000 (the threshold for beginning repayment), your debt will compound every day. So much so that a good number of graduates will find that it is years before they start paying back the actual capital: their repayments will be of accumulated interest. Worse, most graduates will never pay back the capital at all. You start paying back at a rate of 9% of your salary a year until 30 years have passed since your graduation. Then the remainder is written off. An example from financial analysts LEBC via The Times:

“Say a graduate who borrowed £51,600 stated work on £17,000 which rose by 2% a year. He or she would not start repaying the debt for 11 years by which time it would have increased to £67,681 based on RPI at the current level. After 30 years, the graduate would have paid off £7,541 and £83,775 would be written off.”

That’s not a particularly extreme example: according to the Institute for Fiscal Studies, some 70% of graduates will fail to repay their loan in full. Some will work for 30 years, but not earn enough. Some will stop work for years to care for children. Some will work part-time; take years out; or just not work much at all. Some will game the system by holding income inside a company until they turn 53. But either way, 70% is a number that is more likely to rise than fall given how many universities are likely to raise their fees from here: Bristol, Durham, Exeter and Nottingham are all intending to put fees up to £9,250 in 2017, says the Sunday Telegraph.

So here’s the thing. If very few people ever pay off their student loan and the institutions that make those loans know that to be the case, are the loans really loans? Or was the idea always that the taxpayer would pick up the tab with the graduate contributing a percentage of the bill via what looks very much like a 9% graduate tax.

If it looks like a tax and acts like a tax, it is, surely, a tax. And one that means that new graduates earning over £21,000 are paying an effective marginal rate of income tax of 41% (20% income tax, plus 12% national insurance (NI), plus 9% graduate), and that those earning over £43,000 are paying one of 51% (40% plus 9% plus 2%). For almost their entire working lives.

No wonder they can’t afford to save up for houses – and no wonder they have a slightly different attitude to work than those of us who graduated all but debt-free, and as a result pay significantly lower taxes. And as for Myers. Perhaps instead of a debt-free party in 22 years, she should be planning for a “nine percentage points less tax” party in 30 years.

  • AAJ

    “today’s interest rate 4.6%”

    Pricey by today’s low interest rates. You are correct of course, it is simply a graduate tax. If I was graduating now, I’d be looking at ways of reducing the tax just like any other tax liability.

    Look at this issue from a different angle. Are we now conditioning people into believing being massively in debt is a good thing? It appears younger people (younger than myself) are more accepting of personal debt.

  • Cynic_Rick

    And what of the huge amounts written-off? Will it be a case of “the taxpayer picking up the tab”? Or will the tab penultimately and effectively be met with money conjured from out of thin air?

    In the latter case, ultimately, who then is/will be the victims of a further tax by stealth?

    And further, of those accruing the huge amounts written-off, mostly effectively in further education to favourably (for TPTB) massage the unemployment statistics, what benefit do they get from their mostly useless ‘educations’, nay indoctrinations?

    It could be argued that at least some of this superfluous education is the result of mass net immigration slowly but surely, alongside other factors, reducing the overwhelming bulk of citizenry to the lowest common denominator…

  • Merryn

    A post script to this.. I was asked yesterday to participate in a discussion about whether job shares are one of the answers to this: if women can get back into work like this might they find that their wages fall less in the 12 years following the birth of their first child? This clearly works sometimes (https://www.telegraph.co.uk/women/work/how-two-women-became-ceos-through-job-sharing/) but I can’t see it as a solution for many. After all if the reasons why women fall behind are down to less time in the work place, fewer hours done in total (so less experience gained) and so on.. what difference does a job share make? Isn’t job sharing just a special phrase for part time work for professionals?

  • DemiGod

    The end destination, as I understand, is a single government account; so in many ways it functions as a tax receipt. All deductions: 1. Tax, 2. NI, 3. Pension contribution, 4. employer’s NI 5. Student loan 6. Employer’s pension top up etc, unless the pension is private, go to an unfunded government account (no government pension is an investment it is a burden on tomorrow’s tax payers). So in those sectors, 41% total tax is the minimum. The amount it costs to employ someone is much higher and thus the total ‘real’ deduction HMRC receives. It is a wonder graduates have jobs at all given this crippling overhang. But that is why pension ages are rising and robots are coming!

  • Michael T

    Excellent perspective Merryn. A view that came to mind as I read your report may take this a step further.

    Some months ago, Moneyweek ran an article about Bank Bonds. I wrote to John Stepek and Merryn Somerset Webb as I did not feel that the “health warning” given by Money Week was stated quite strongly enough. We had been personally “burned”.

    The Bank of Ireland found themselves in financial trouble. My wife was a holder of BOI PIBS. This is a link to an article from the BBC that describes how the BOI decided was the best way (for them!) to address their financial issue, at the expense of the people who had leant them money in good faith. https://www.bbc.co.uk/news/business-13731997

    “Burden sharing” was the way it was described. I.e the people who leant the BOI money were then forced to “share in the burden” of the BOIs financial hardship by the BOI enforcing a writedown on the loan that they held with the general public who had leant them money. It is not dissimilar to the Cyprus bank crisis “resolution” where Cyprus banks simply took money from the account holder with most money.

    With regards to Student Debt where for the past 4 years the students have to take out loans (or fork out capital) to cover the new charges for university education: is this just a “forward application” of a similar nature? I.e. the government could in years to come increase income tax to address their deficit caused by providing free university education as they have in the past, but isn’t it easier to “burden share” now and just impose these upfront taxes by way of loans on students as Merryn describes? After all the students beleive that they need their education and probably have limited understanding of the debt issue that they face in future years. The government on the other hand know that they need to educate the workforce to support and grow the economy. To actually financially burden the students in such a way and educate the workforce, AND at the same time address their own (the government’s) financial burden at the expense of the students must surely be one of the most jaw dropping of examples of exploitation.

    AAJ. You wrote “Are we now conditioning people into believing being massively in debt is a good thing?”. I fear that that is what the government need to happen, yes. To reduce their own debt they need others to take on debt (transfer of debt in the form of student loans is an example) AND/OR to be in a similar position (i.e. “in debt”) so that fiscal measures to reduce debt (low interest rates, high inflation etc.) are acceptable for a majority of the electorate. i.e it appears that “Borrow money (increase debts), spend it, make the debt disappear” is what the government need, and its better for them if the electorate are in the same position and of the same mindset. Savers, who are quickly becoming a minority I sincerely expect, haven’t really got a hope. They face a future of fiscal policies that intend to take their savings away from them in support of the majority of debtors.

    I don’t thinkthat it can work out well by the way for anyone if this approah continues as there will only be debt. All wealth may well be irradicated and not transferred. Look at past Hyper Inflation scenarios to appreciate what I mean.