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“A 30-year debt sentence”; “a tax on ambition” that has created “a new social class of the educated, but indebted”.
Young professionals are bitterly angry about the student loans system, with growing numbers protesting that agreements they were encouraged to sign up to as 18-year-old school pupils are blighting their financial futures in ways they never realised were possible. Do they have a point?
Having corresponded with hundreds of graduates on social media this week, I certainly think they do — and employers and MPs should take note.
If, like me, you were lucky enough to get your university degree before the introduction of £9,000 tuition fees in 2012, here’s how the system works.
Student loan repayments are income contingent. You only start to repay when your income rises above a certain threshold; currently just under £29,000 for those with Plan 2 loans who started studying in England and Wales between 2012 and 2023. You repay a fixed 9 per cent of your income above this level; earn less, and you repay nothing (though interest is still applied to the balance). If you haven’t cleared your loan after 30 years, it is wiped.
Student loans have leapt up the political agenda because of changes announced at the Budget. From April 2027, the Plan 2 repayment threshold will be frozen for three years. This means a double dose of fiscal drag for graduates — as their pay increases, more of it will be taxed at higher rates. Those who are also on the cusp of frozen income tax thresholds feel especially squeezed.
George Holmes, a 27-year-old economics graduate from Bristol, has just crossed the £50,000 higher-rate tax threshold. For every pound he earns above this level, he gets to keep 49 pence after income tax, national insurance and loan repayments. He works for a blue-chip company, but has requested to reduce his working hours, calculating that he’d only lose £80 a week from his net pay by not working on Fridays.
“It’s highly demotivating,” he says. He could push for promotion, but like most graduates with Plan 2 loans, he’s worked out he’s unlikely to repay the full loan amount. The interest being added to his loan balance every year (charged at RPI plus 3 per cent for the highest earners) is dispiritingly greater than his annual repayments. So he expects to be stuck paying 9 per cent extra income tax for 30 years — a reality that more graduates are waking up to in the cost of living crisis.
Some professionals I’ve chatted to this week describe their repayments as a “tax on ambition”. After the £50,000 pinch point, there’s another marginal tax rate squeeze for parents at £60,000 (where child benefit starts to be tapered away) and £100,000 where the personal allowance and free childcare funding is lost. Yes, these sky-high marginal rates impact all higher earners, hence the rising popularity of salary sacrifice, but those repaying an extra 9 per cent on top — or 15 per cent if they have taken out a postgraduate loan — simply feel crushed.
Some brave souls have sat down with their older bosses, gone through the numbers and said: “Now do you see why I can’t afford to take on the extra hours or stress of a promotion without a much bigger pay rise?” Bosses are aghast; so should be economists pondering the UK’s productivity puzzle.
The weak graduate jobs market and huge costs of renting and childcare are three further factors that make this income squeeze all the harder for the young. I’ve had heartbreaking messages from those who fear that despite having been to uni and secured what appears to be a good job, they will be unlikely to afford to own a property, or even start a family.
Of course, their financial fate cannot be blamed solely on the student loans system. But many feel it is widening existing inequalities. Describing student loans as a “graduate tax” attracts ire, as not all graduates pay it. Those from wealthier backgrounds, whose parents paid their tuition fees, can be hundreds of pounds better off a month than colleagues on the same wage who had to borrow. A similar resentment extends to older siblings who escaped higher tuition fees, and have found it easier to save up housing deposits, access bigger mortgages or invest for their future.
Some of the highest earners who actually stand a chance of clearing their loan within 30 years are debating whether they should risk repaying it early. Some have borrowed money from family; others are considering using savings. Obviously, crystallising an income-contingent debt they might never have to repay is a highly risky move. But trust in the system has been eroded by past and future changes to repayment terms.
Even some financial professionals argue that the Financial Conduct Authority’s Consumer Duty principles should apply to student loans, noting the vulnerability of teens who sign on the dotted line, and the weak bargaining position that those who have taken out loans now find themselves in.
So I’m not surprised the Rethink Repayment campaign has gained so much traction since the Budget. Arguing that the 9 per cent repayment rate should be lowered to 5 per cent, its 26-year-old founder Oliver Gardner urges his supporters to lobby their MPs, noting how many of them are also repaying student loans. “The economic injustice we are facing is the issue that will politically re-energise my generation,” he predicts.
Will politicians take heed of this widening intergenerational divide? We’ve had plenty of Budget U-turns, but a reversal of next April’s student loan repayment threshold freeze would be a welcome sign that somebody is actually listening.
Claer Barrett is the FT’s consumer editor; claer.barrett@ft.com Instagram @ClaerB
