The graduate tax masquerading as student loans

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.


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