Podcast Summary: Merryn Talks Money – "The 51% Graduate Tax"

Host: Merryn Somerset Webb
Guest: John Stepek, Bloomberg Senior Reporter, Author of Money Distilled
Date: February 25, 2026

Episode Overview

This episode tackles the increasingly pressing issue of UK student loans, particularly focusing on how the structure of loan repayment has effectively turned into a punitive "51% graduate tax" for many, with rising burdens affecting the working lives and financial planning of a whole generation. Merryn Somerset Webb and her guest, John Stepek, break down the numbers, the psychology, and the politics surrounding student debt—shedding light on why outrage is finally gaining traction, why the system is becoming ever more punitive, and what realistic reforms could look like.

Key Discussion Points and Insights

1. Student Loan Structure and the Effective "Graduate Tax"

• Complexity of Plans: There are several student loan types in the UK, but the most contentious is Plan 2 (for students from 2012–2022), with Plan 5 (from 2023) expected to be an even longer burden.
• The Real Tax Rate: Graduates crossing the 40% income tax threshold actually pay an effective marginal rate of 51% once national insurance and student loan repayments (9% over the threshold) are included.
  • Quote:

    "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... maybe 30 years. Probably 30 years."
    – Merryn Somerset Webb (03:41)

• Duration: Plan 2 loans can last up to 30 years; Plan 5 loans extend to 40 years—making this an enduring, lifelong financial drag.

2. Why Is This Becoming a Mass Issue Now?

• Changing Demographics of Borrowers:

  "People who graduated in... 2016 [are] 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... they're starting to notice... 'I'm paying 51% [tax], and basically there's nothing left for me at the end of the day.'"
  – John Stepek (04:49)

• Annual Reminders: The psychological weight of receiving yearly statements showing huge, possibly increasing, balances—despite regular repayments—makes it harder to ignore.

3. Psychological & Practical Burdens

• Debt as a Form of Tax: The system is framed as a "graduate contribution" by some commentators (e.g., Martin Lewis), but the hosts challenge this as misleading due to the psychological impact and real financial constraints.
  • Quote:

    "If you get a letter every year telling you that you owe £40,000, £50,000... and even though you've been paying it off... you may owe more at the end of the year than you did at the beginning."
    – Merryn Somerset Webb (06:11)

  • Quote:

    "They sort of see this inability to pay this debt off as some kind of personal failure... but it's a huge financial planning issue."
    – John Stepek (06:40)

• Planning for the Unknown: Because repayment depends on lifelong earnings, career breaks, or part-time work, it is exceedingly difficult to plan rationally for repayment vs. ignoring the debt:
  • Quote:

    "Decisions you should make on your student loan... [depend on] the way that your earnings were going to work. And not only that, your earnings and your life events..."
    – John Stepek (07:21)

4. System Unfairness and Fiscal Drag

• Moving Goalposts: Loan terms keep changing, often to the detriment of borrowers. Interest is charged at RPI (Retail Price Index), which is consistently higher than CPI (Consumer Price Index) used for other government calculations.
  • Quote:

    "The government uses CPI for almost everything, because they no longer consider RPI to be a reasonable measure of inflation. But... with student loans... it's much better for them to use RPI, because it generally comes in about 1 percentage point higher."
    – Merryn Somerset Webb (09:41)

• Fiscal Drag: Loan repayment thresholds are frequently frozen, meaning more people are caught by repayments as wages (slowly) rise due to inflation.
  • Quote:

    "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."
    – Merryn Somerset Webb (12:05)

5. The Value Proposition of University

• Is It Worth It Anymore?

  "Is this thing worth paying 60 grand for?... Now we [ask whether] getting a degree [is] actually value for money in a way that you didn't have to... because it didn't ultimately cost as much or anything at all."
  – John Stepek (12:18)

• Alternative Framing:

  "I'd say, is it worth 9 percentage points of extra tax for your entire working life?"
  – Merryn Somerset Webb (13:45)

6. Practical Financial Decisions for Parents and Graduates

• Repaying vs. Supporting in Other Ways: Prioritizing between paying off the loan, helping with a house deposit, or other financial support is highly individualized.
• Higher Priorities:

  "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."
  – John Stepek (15:00)

• Debt vs. Mortgage vs. Pension: Limited funds are usually better directed towards immediate housing or retirement needs rather than early student loan repayment for most families.

7. Prospects for Reform

• Interest Rate Reductions/Funding Models: Some politicians advocate for lower interest rates or higher repayment thresholds, but hosts suggest these are minor tweaks to a broken system.
  • Quote:

    "Maybe... there be really no interest rate on it at all. Just pay it back in nominal terms and be done with it."
    – Merryn Somerset Webb (15:54)

• Structural Economic Problem:

  "My absolute top pick would be 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."
  – Merryn Somerset Webb (16:40)

• International Comparisons: The UK is an outlier:

  "The UK is the only place where the graduate premium has gone down... and his point is basically it's just because [other countries] produced the decent high paying jobs... we haven't."
  – John Stepek (17:16)

Notable Quotes & Memorable Moments

• On the psychological burden:

  "A lot of people are going to uni and... 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."
  – John Stepek (06:40)

• On the moving regulatory goalposts:

  "They're shifting the goalposts all the time in order to increase the revenues from it, as if it were a tax."
  – Merryn Somerset Webb (12:05)

• On the case for apprenticeships:

  "If you are about to go to uni, look at things like apprenticeships as well or instead... you maybe have to think about it with a slightly harder head than a lot of people around you are encouraging you to do."
  – John Stepek (19:41)

• Closing note of realism:

  "I don't see... [a solution] coming down the tracks anytime soon."
  – Merryn Somerset Webb (19:10)

Timestamps for Key Segments

• 02:55 – Start of conversation; outlining student loan types and basic problem statement.
• 03:41 – High marginal tax rates faced by graduates; Plan 2 & Plan 5 explained.
• 04:49 – Why frustration is spiking now among mid-career graduates.
• 06:10–06:33 – Student loans as "fake debt" vs. real psychological/financial burden.
• 09:41 – Unfairness: RPI vs. CPI and progressive interest rates.
• 12:18 – Broader economic context and university value proposition.
• 15:54 – Reform proposals and the importance of economic growth.
• 17:16–17:55 – International comparisons; the declining graduate premium.
• 19:41 – Practical advice: Consider non-university paths.

Conclusion

The episode delivers a candid, in-depth exploration of the UK student loan “graduate tax,” detailing its real-world impact, economic roots, and the psychological burden it creates. Hosts challenge the prevailing framing of student debt as benign, dissect current reform proposals, and ultimately argue that deeper structural solutions—namely, boosting the UK’s supply of high-income jobs—are required for relief. In the meantime, they urge both parents and students to recalibrate the value of university and critically assess alternatives.