If you thought young people in Britain had already been hammered beyond the realms of any sane system – by pandemic job losses, soaring house prices, and their expensive degrees being taught primarily online for 18 months – think again. Yesterday the Financial Times reported that “No 10 plans to lower salary level at which graduates start repaying loans”.
According to the report, the plan is to reduce the salary threshold at which graduates start to repay their student loans, at present £27,295, to somewhere around £23,000 – which would save the Treasury £2bn a year.
This is the same Treasury, we should point out, that has just decided to raise National Insurance by 10 per cent for all working people. Because student loan repayments work like a graduate tax, taken off the payslip and sent straight to HMRC, this works out at an exorbitant tax rate for those who started their degrees after 2012 (when tuition fees were raised to £9,000 a year). The New Statesman’s George Eaton has looked at the impact this hike will have: “graduates earning more than £27,295 will pay a marginal tax rate of 42.25 per cent once student loan repayments are included… By contrast, a non-graduate earning up to £50,270 will pay 33.25 per cent. A graduate who earns more than £50,270, meanwhile, will pay a marginal rate of 52.25 per cent, while a non-graduate earning up to £100,000 will pay 42.25 per cent.” Add in employer National Insurance and, the FT has calculated, the standard tax rate tops 50 per cent.
This means university leavers struggling with the UK’s dysfunctional rental market paying a higher rate of tax than their landlords.
[See also: How the tax system squeezes graduates]
But that isn’t enough. Were the loan repayment threshold to be reduced to £23,000, graduates would – according to Money Saving Expert founder Martin Lewis – pay around £400 more per year, for 30 years. Combined with the National Insurance rise that comes into force in April, graduates are looking at an £800-a-year pay cut.
To be plain. Cutting tuition fees to £7,500 ONLY benefits the highest earning graduates, the rest still repay the same 9% of earning above the threshold for 30yrs.— Martin Lewis (@MartinSLewis) September 27, 2021
While lowering the threshold to eg £23,000 means most earning above that would pay £400/yr more for 30yrs.
Shockingly, the FT report suggests Downing Street is planning to make this plan retroactive, citing “millions of new and existing graduates” who will be hit by the change. As Martin Lewis has pointed out, the 2018 research being pointed to as justification for the increase, the Augur Review, specifically recommends not adjusting the threshold for those who have already taken out loans. Perhaps the government only read the bits it wanted to.
Changing the terms of an agreement retrospectively is a violation of contract law. That is reason alone for Conservatives who don’t trouble themselves much about students to think very hard about supporting this change – if they want to still call themselves the party of law and order. But something else is going on here too. Somehow, we’ve managed to create a system where students are encouraged to sign up to loan agreements with absurd terms, and then when they struggle with that absurdity, use their failure as justification for making the system worse.
The government likes to pretend, when it suits them, that student loans aren’t like other loans. To school leavers terrified at the idea of borrowing tens of thousands of pounds, the message is: don’t worry, it’s not really debt in the conventional sense. The Ucas page on student finance tells prospective students: “The important thing to remember is that the amount you’ll repay will be based on how much you earn, not how much you borrow” – again, like a tax rather than a loan. The repayment threshold is set out in a helpful table advising applicants how much they will repay at various salaries. It doesn’t mention that these terms can change whenever the government feels like it.
Focusing on repayments being tied to income – with unemployed or low-paid graduates not having to make payments at all – is what enabled the coalition government to argue that tripling tuition fees from £3,000 to £9,000 wouldn’t be regressive. If what you pay back is linked to what you earn, theoretically no one should worry about getting into debt they can’t repay; after 30 years, any remaining debt would be wiped out.
The emphasis on this principle draws the attention – of students, parents, and the media – away from other quirks of student loan system, namely exorbitant interest rates that make the loans virtually impossible to pay back. Interest starts being charged from the moment the first loan payment is made, and accrues at a compound rate throughout the student’s degree. It is charged at the retail price index (RPI) plus three percentage points while the person is studying. (The interest rate after they have graduated is based on their income, but is always above RPI.)
Let’s leave the criticism of RPI as a measure of inflation for another article (although it’s worth noting that in 2020 the National Statistician, Ian Diamond, said it was “not fit for purpose”) and look at an example of what this means. In 2017, after a surge of inflation, RPI hit 3.1 per cent, making the interest on student loans for those still studying 6.1 per cent. At the time, the Bank of England base rate was 0.25 per cent – meaning student loans were 24 times more expensive. For context, the Guardian reports that personal loans from high street banks had rates starting at 2.8 per cent, while five-year fixed-rate mortgages were available from 1.29 per cent, and that the UK student loan rate was significantly higher than that charged for federally backed student loans in the US.
[See also: Why New Age puritans are the enemies of progress]
It is this barbaric way of calculating interest that means the Institute for Fiscal Studies estimated in 2017 the average student would have accrued £5,800 in interest over the course of their degree. Upon leaving university, an English graduate owes, on average, over £45,000. Compound interest means that full repayment soars ever further out of reach. After six years of working, one of my friends owes £6,000 more than she did when she graduated. Little wonder the government estimates 83 per cent of graduates won’t ever repay their loans in full.
Now watch for the political sleight of hand. This low proportion of full repayment is being used as justification for making graduates pay back more earlier, as if they are somehow scamming the system. Lost in the debate is that the reason full repayment is so unusual is because the interest rate is so high. And we don’t talk about the (lack of) justification for such a high interest rate because student loans aren’t like other loans. Unless it’s in the government’s interest to treat them that way.
If the government is in the business of retroactively changing terms, why not scrap the facade that these are loan repayments and impose a graduate tax on everyone who attended university in this country, including before tuition fees were introduced in 1998? After all, past generations had their degrees funded entirely by the taxpayer – maybe they should be asked to contribute for the education other people paid for. But it’s easier for the Treasury to treat struggling graduates as cash cows to keep milking, confident that their plight rarely registers with older Tory voters, who, having enjoyed all kinds of benefits for free, are happy to snatch them away from younger generations.