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- [00:00]
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- [01:43]
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- [02:21]
Maren Sumset Webb
Bloomberg Audio Studios Podcasts Radio News. Hello and welcome to marantalks yous Money, the personal finance edition of marantalks Money. In these bonus podcasts, we talk about the best strategies for making the most of money. I'm Maren Sumset Webb and with me today, senior reporter and Money Distilled author John Stapek. Hey, John.
- [02:51]
John Stapek
Hi, Mel.
- [02:56]
Maren Sumset Webb
Okay, John, so this week we are tackling a topic that you and I have talked about a lot over the years and everyone else has finally noticed. It is student loans. Now there's rising graduate debt levels. There's lots of pressure refer reform. Might there be some possibility of change in the current system and what might it look like? We'll get on to that in a minute. But let's just talk what is happening here. I mean, there are a variety of different kinds of student loans. I can't even remember how many are there five different types of student loan depending on when you took it out. But the one that's really causing ructions at the moment is the Plan 2, which I think runs from people who were at University between 2012 and 2022. Just correct me when I'm wrong. You're better in detail than I am.
- [03:40]
John Stapek
No, no.
- [03:42]
Maren Sumset Webb
Okay. But whatever your plan, you end up paying effectively 9 percentage points extra in tax above the repayment threshold. And we've talked about that over the years because we think it's part of the thing that disincentivizes people from working. We think it's all from taking promotions, at least we think it's one of the things that makes life so very, very difficult for the young in the UK because they're paying a phenomenally high effective rate of tax. You know, you think, you think maybe you've just gone over the 40% threshold, but in fact, your new tax rate is 51% by the time taken into account student loan and national insurance. And this seems kind of shocking, particularly as for the majority of people, it's going to be with you not just for five years, 10 years, 20 years, but maybe 30 years. Probably 30 years. And of course, on the newest plan, which is a plan five, I think it's 40 years, not 30 years. And people are suddenly beginning to notice that this is a really shocking burden to have to carry for your entire working life. But I suppose the first question I want to ask is, why do you think people are noticing now when we've been talking about it for years?
- [04:50]
John Stapek
I think it's like a lot of these things, it's only when a critical mass of people are being actually pummeled by it. I think one issue is because Obviously the plan two started in 2012. So the kinds of people who graduated in, say, 2016 going to be in their kind of like 30s now, starting families, working in kind of middle management, getting to the bit of their career where they feel that they should be earning enough to buy a house and start a family. Quite a few of those people are working in the media, you know, so they get columns in the Times or whatever, and they're starting to notice that. Hold on a minute. Like, I'm a 40% taxpayer, but yes, I'm paying 51% on top of that, I'm paying in my auto enrollment pension. And basically there's nothing left for me at the end of the day. And I thought things were going to be easier by now, so I guess they've just started. And also, of course, they're getting a letter from the student loans company every year and they're kind of looking at it and they're thinking, wait a minute. Oh, at least as much as I did the day I graduated. And that was a decade ago.
- [05:50]
Maren Sumset Webb
Yeah, I think that's one of the really interesting things about it, isn't it? Is that people keep saying, oh, don't worry about it. It's not a big deal. If you don't earn enough money, you don't pay it off. It's not like a real debt. It's not like a real debt. It's just a graduate contribution is how Martin Lewis and I strongly disagree with most of what he says about student loans, but he keeps referring to it as a graduate contribution. And it really.
- [06:10]
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It's just.
- [06:11]
Maren Sumset Webb
It's not that big a deal. It's not like a real debt. But if you get a letter every year telling you that you owe £40,000, £50,000, 60, 70, £80,000, and that worse, even though you've been paying it off all year, or you think you have at the end of the year because the interest rate is very high, you may owe more at the end of the year than you did at the beginning, despite the fact that you felt you paid some off.
- [06:34]
John Stapek
Yeah. And I think the other problem is that, I mean, you've said this before, but there's the psychological burden of having that hanging over you.
- [06:41]
Maren Sumset Webb
Yeah.
- [06:41]
John Stapek
A lot of people are going to uni and the people who are complaining about this, all sort of people who consider themselves to be high achievers. And so they sort of see this inability to pay this debt off as some kind of personal failure. But also, I mean, at the end of this, it's more than just psychological. It's a huge financial planning issue. Because, you know, we talk about retirement. The big problem with retirement is that is fundamentally full of uncertainties. And the main uncertainty is obviously you don't know when you're going to die and you do not know the pattern of your spending between the time you retire and the time that you kind of pass away. And student loans are a lot like that. It's like if you wanted to know what you should do with your student loan, you would have to have perfect certainty about the way that your earnings were going to work. And not only that, your earnings and your life events. I mean, like good example is, you know, what happens if you have kids? You know, you know, you may be a high flying kind of graduate at 29, 30, doing well, but what if you'd say take a career break and then you decide, well, actually after kind of a year on maternity or paternity leave, that I say I'm going to be the one that stays home and looks after the kids for another couple of years. That's completely different. Decisions you should make on your student loan.
- [07:58]
Maren Sumset Webb
You mean in terms of whether you should take a loan or not, whether you should try and get your parents to pay it up front or how you should do everything?
- [08:04]
John Stapek
Yeah, well, exactly. The financial side is kind of nightmarish from that point of view because at the end of the day, if you were to just leave uni and then not get a job at all, then yes, it would be pointless to pay back your student loan because you'd be paying back 60,000 pound odds and you would never ever actually have had to
- [08:22]
Maren Sumset Webb
repay that, John, I suppose unless you felt you had a duty to other taxpayers to pay you away.
- [08:28]
John Stapek
I feel that we've already demonstrated this is not the case. You can't rely on your fellow human beings for that.
- [08:36]
Maren Sumset Webb
You can't. I mean, I suppose when, when people look at it and say, well, it's not like a real loan, it's, you know, it's a lump sum that you might never pay off. And so in the end then maybe a very large number of people will never pay back where they borrowed. So what's the problem? I think that that's a confusion, isn't it? Between effectively stock and flow, right?
- [08:51]
John Stapek
Yeah.
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Maren Sumset Webb
You're still paying 9 percentage points extra every year and that's a massive burden, regardless of what the big number is, whether you pay it off or not.
- [08:58]
John Stapek
Well, it is, but also, I mean, the other thing is, the reason they keep changing it, and I think this is, this is actually important, is that the government is then increasing the number of people who do end up having to pay it back. And I think that's it. Because you're right, people started off saying oh, well, it's not a real loan and it doesn't matter that much anyway. But the closer it gets to being something that will actually know this is just a sum of money that you have to pay off over your working lifetime, you can no longer keep dismissing it like that. I mean, A low Plan 2 is the one people are complaining about. Plan 5 actually moves it much further along. That way the interest rate doesn't look as ugly, but the fact you have to pay over 40 years, around 30, means that far more people are going to end up paying the whole thing.
- [09:42]
Maren Sumset Webb
Yeah, and I think people are beginning to notice some of the unfairnesses here. And one of the things that you hear people now talking about over and over again with the Plan 2 loans and the Plan 5, by the way, is that the interest rate is based on rpi, not cpi. Now, the government uses CPI for almost everything because they no longer consider RPI to be a reasonable measure of inflation. But of course, when it comes to money that the government is keen to receive, it's much better for them to use RPI because it generally comes in about 1 percentage point higher than CPI. So if you say, well, all student loans are based, the interest rate is based on rpi, that brings in a lot more money, but also it's kind of unfair because it's not used for anything else. And then if you look at Plan five, the one that most recent students are on, the interest rate is just RPI. That's it. But you pay back over 40 years. Right. But plan two, it's your RPI. And then in a sort of bout of extraordinary progressiveness, because the UK tax system is one of the most progressive in the world, I don't think people grasp that very often. But this is yet another example of why this is a tax, not a loan, and not just a tax, but a very, very progressive tax, the interest rate you pay goes up as you earn more. So at the bottom of the threshold, when you go over that threshold and for type 2 loans, it's just over 28,000, isn't it? 28,400 ish pound. At that level you just pay RPI. By the time you get up to the top, you're playing RPI plus 3 percentage points. So these interest rates are very high and that doesn't seem quite right.
- [11:11]
John Stapek
Yeah, and to be clear, by the way, the top is just 51,000. So it's the bottom of the 40% tax bracket.
- [11:18]
Maren Sumset Webb
And the other great unfairness that I think people have now noticed is this Business of the threshold being frozen. So at the moment, we've just said it's over 28,000, the current threshold, it's going to be moved up to 29,380 from April 2027, but then frozen for three years. And this brings us into fiscal drag, which people perfectly reasonably say is not something that should be used in this context to let inflation deal with the problem. So if you've been listening to government ministers talking about this recently and Rachel Reeves herself talking about it, one of the things they say is, oh, well, you know, we're keeping an eye on this. I know, we're watching it. No dare, you know, poor people, et cetera. But. But we've got a lot of stuff to pay for. And suddenly you look at this and you're like, yeah, that's a tax. That is a tax. They're shifting the goalposts all the time in order to increase the revenues from it, as if it were a tax to, you know, have it help pay for other things, etc. So that's obviously absolutely maddening for people with this debt.
- [12:19]
John Stapek
Yeah. And it's also a worry because as soon as it gets recognized in that way, then the direction just keeps moving towards it. Being a tax is one thing. You know, we sit here and we talk about how you should for this, how should you think about paying for this. And in an ideal world, yeah, you would have, you know, like, the resources, parents would have the resources to actually just pay for it upfront, and it wouldn't be something you had to worry about. But I think we now have to think about getting a degree as is it actually value for money in a way that you didn't have to whenever we went to uni, because it didn't ultimately cost as much or anything at all, depending. Whereas now we young people have that luxury anymore. You know, basically, is this thing worth paying 60 grand for? You know, and that's. So that then moves away from all the university experience of, you know, getting away from your hometown and meeting new people and all the rest of it. Well, you can do that in other ways that aren't going to cost you that kind of money. So I think it's something that has to be seriously kind of thought about, as opposed to all these people you see trotted out on Newsnight and all the rest of it who went to uni in 1975 or whatever when somebody paid them to do it. And they can waft on about how, oh, yeah, it's all about, you know, kind of the enlightenment and learning and education for the sake of it, you can't. That's no longer a luxury that we've got.
- [13:45]
Maren Sumset Webb
No. And yeah, and it's interesting that when you were talking about it just now, you said, is it worth 64 grand, 65 grand, 70 grand? And I would say the other way around. I'd say, is it worth 9 percentage points of extra tax for your entire working life?
- [13:59]
John Stapek
Yeah, I mean that too. I mean, I think the only benefit to seeing 60 grand is because it actually puts a figure on it up front. Whereas I think a lot of people, until you're actually paying that 9%, you're not aware of just how brutal that is in terms of extra tax.
- [14:25]
Maren Sumset Webb
So, okay, onto the real questions. Now. We've done a podcast before, you and I, on whether if you can afford it, you should pay for your kids education up front. And I think, you know, we came down on the side of, well, I don't know, it depends if you have plenty of money and you want to relieve your child of that psychological burden. Absolutely. If you have a limited amount of money, are you better off putting it into a house deposit for them later or putting it into a pension for them or into an ISA for them, etc. So choices, choices, choices. And we can't really have a clear view for any individual, can we?
- [15:01]
John Stapek
Unfortunately not. Again, I think this is kind of the problem with it being more like a tax than a debt because it's always going to be fighting as a priority with all the other things that you need to pay for. And so many of those things are higher priority, like buying a house. If you've got a choice between paying extra to your student debt or saving up for a housing deposit, there really isn't any contest there because, well, where's the money for the house going to come from? If you've whacked into the student loan, obviously emergency fund needs to be built up before you even consider any of this.
- [15:35]
Maren Sumset Webb
And then pension, well, 100% mortgage. You get 100% mortgage and you've got a higher cash flow. Makes it easier to get a mortgage.
- [15:42]
John Stapek
I mean, that's true. You could. Yeah, if you want to, you could. I mean, I assume you can get one, but then you probably get two expensive forms of debt coming out, something your finances every month.
- [15:55]
Maren Sumset Webb
Yeah. Okay, so how do we solve this problem? Now Kemi Badenoch has been out saying, let's get this interest rate down, get it down. And that will help. But of course it only helps to a certain degree because Even if you're paying a significantly lower rate of interest, you might still end up paying the 9 percentage points for the rest of your career. So the other side of this Martin Lewis argument is that the threshold should be higher, significantly higher, and that would make the difference. My own view is that they're both wrong because that's a good way to go with this kind of thing. And then in fact the best thing to do would be to maybe, I don't really know about the threshold. Thousand pounds here, thousand pounds there is not going to make much difference to people over a career. But it would make sense for there to be really no interest rate on it at all. Just pay it back in nominal terms and be done with it. Then we're subsidizing education to a degree. To a degree. But there's still repayment. That would work. And the other possibility, and you know I would really go great guns with this one, this would be my absolute top pick, absolute top pick would be to work a little harder to create an economy that creates an awful lot of high income jobs so that paying this debt off isn't such an extraordinary burden. A world where people don't aspire to earning 42,000 pounds but are pretty sure that if they really do well, they'll be earning 170. That's the actual answer, right?
- [17:17]
John Stapek
Yeah. There's a data journalist over in the ft, John Byrne Murdoch who did a really good piece on this and they basically pointed out that the UK is the only place where the graduate premium has gone down. Even the low student participation has gone up in loads of different countries. So it's not just as I, to be fair, I fell into this a bit. I thought it's because we get so many graduates now that the graduate premium has gone down, but it just isn't echoed elsewhere, including places like, you know, the U.S. and Australia. And his point is basically it's just because they've produced the decent high paying jobs. There are enough graduate jobs to go to, we haven't. So we could low growth.
- [17:56]
Maren Sumset Webb
Low, low growth and low productivity. And that's why people care about these loans so much. That's why they're such a burden, is because we can't create the high income jobs to pay them off easily, to make them enough people will be able to brush them off and say, well, that'll be gone by the time I'm 34. I'm all good.
- [18:11]
John Stapek
It's also interesting because employers are always complaining about how we don't have a skilled enough workforce and that's why we need to import lots of people. But as it turns out, we seem to have an overly qualified workforce for whom employers can't provide the jobs. So that's a sort of interesting side issue there. But perhaps when we can tackle another day.
- [18:32]
Maren Sumset Webb
Yeah. Anyway, so I suppose we, what we come down to here is will there be reform? Very probably. I would expect somebody to do something quite soon. Remember, there are well over 5 million people on that type 2 of student loan and so that's, that's quite a big voting block right there. So someone will want to do something for them. But I strongly suspect that whether we talk about putting the threshold up by a couple of grand or reducing the interest rate a little bit or making the interest rate maybe even less progressive so that everyone pays the same rate regardless of income, whatever, something like that, but in the main that's not going to make the difference. What's really going to make the difference is not having less to pay back, but earning more so it doesn't feel such a burden. And I don't see, and maybe you have a different view, but I don't see that coming down the tracks anytime soon.
- [19:16]
John Stapek
Well, yeah, it's just added to Britain's kind of long list of apparently unsolvable problems that could all be sorted if we just did slightly cheaper energy.
- [19:29]
Maren Sumset Webb
That would be, that would go quite a long way, John. Quite a long way, huh? Right. We don't want to get into a different conversation and I am sorry students, I don't feel that we have offered you a lot of hope here.
- [19:41]
John Stapek
If you are about to go to uni, look at things like apprenticeships as well or instead, you know, like just, just think about your options. I'm not saying don't go, but you maybe have to think about it with a slightly harder head than a lot of people around you are encouraging to do.
- [20:00]
Maren Sumset Webb
Thanks for listening to this week's Marin Talks yous Money. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter Ernest W. And JohnStephek. This episode is produced by Sama Saadi and Moses Andam. Questions and comments on this show and I think on this point you will have questions and comments and on all our shows are always welcome. Our show email is merriamoneylumberg.com net.
- [20:30]
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