We’ve been complaining about the new student loans system here for a while. We think it is less a loan system than a progressive tax system deisgned to force graduates who do reasonably well to finance the education of those who do not.
I’m pleased then to see a new report out from The Intergenerational Foundation that very clearly agrees.
During the period in which you are studying, the interest you – and everyone else – pay on your debt is rolled up annually at RPI plus 3% (note the use of RPI rather than the generally lower CPI the government uses when the state is paying rather than charging).
After graduation, however, this level playing field disappears. If you are earning under £21,000 you are only charged RPI. If you earn between £21,000 and £41,000 you are charged on a sliding scale of an extra 0.15% for every £1,000 more you earn up to RPI plus 3%. Over £41,000 everyone’s on RPI plus 3%.
So the more you earn, the higher the rate of interest. The Telegraph points to two examples. A and B both have a debt of £40,000. A earns £42,000, so he has to pay £1,890 towards his debt in year one. But thanks to the interest rate he is stuck with, his debt actually grows by over £2,600. B earns £22,000. He has to pay only £90 towards his debt and, because he is charged a lower rate of interest, his debt only grows by £1,438.
We can look at this another way too. Add up A’s income tax payments, his NI and his repayments and you find he has paid a total of 30% of his income in state mandated reductions. B will have paid 19%. Before taking account of the repayments, those numbers are 25% and 19%. If you view the rises in the debt as effective reductions the difference is even wider.
That’s a progressive tax by any definition.
You may think all this is OK. And maybe it is. Perhaps a progressive graduate tax is a good idea. Perhaps it is the only way to pay for everyone to go to university. I don’t happen to think it is. I also don’t think it is reasonable for the fact that it is a tax to be covered up with the language of loans.
The other thing it is worth noticing – and strongly objecting to – is the fact that this new tax system is highly unlikely to raise enough money to cover the costs it is committed to. Why?
Look at the numbers above again. Both A and B are seeing their debt increase at speed even as they make payments. Their salaries are going to have to rise massively for them to even begin to start eating into the principal they owe – and that’s even on relatively low levels of debt.
Our new system puts itself about as offering easy (if not cheap) money to anyone who fancies getting it regardless of any likely ability to repay (people at ‘bad’ universities doing useless courses can borrow as much as those studying, say, medicine at Oxbridge). But in the end someone has to pick up the bill. Taxpayers perhaps?
For a hint of the possible debacle to come here’s a piece from the Washington Post noting that in the US not many more than “50% of those who enter college leave with a bachelor’s degree.” And a chart showing the rise and rise of student debt.
PS This is also of interest – student loans in the US end up so onerous that even the Obamas only paid theirs off some nine years ago.