Asking graduates to pay more may not be the little “tweak” we think it is

Will Westminster ministers dare to lower the student loan repayment threshold after a week of concern about the tax rates facing graduates? Jim Dickinson reads the runes.

Jim is an Associate Editor at Wonkhe

When I worked at NUS years ago, we’d always be on the hunt for issues where the leader writers at the Guardian and the Telegraph would agree.

They don’t come along very often, but are obviously pretty handy if you’re trying to ward off a proposal. “Tripling tuition fees” was one of them – and we know what happened next.

I raise that because ever since a couple of students’ unions revealed that lots of the changes that some would like to make to the student loans system would be regressive, the English sector has been doubling down on a particular position on fees and funding going into the forthcoming Comprehensive Spending Review.

When it comes to the three ways that you can save money on the home undergraduate scheme, the basic plan has been to ramp up the threats posed by minimum entry/exit requirements and reducing the unit of resource, and to play down making graduates pay more as a technical “tweak”.

Back in June HEPI’s Nick Hillman argued that lowering the graduate repayment threshold would be the least worst option, and by September new Universities UK President Steve West was teeing up Gavin Williamson’s speech to UUK Conference by warning that:

Now is not the time to shrink or underfund universities or colleges”

…and by warning that:

Now is not the time to crush aspiration and social mobility by reducing places for people to study at university.”

You’ll note that he didn’t also argue that now is not the time to ask struggling young graduates to contribute more. But after a week in which widespread concern emerged over the marginal tax rates now being faced by graduates, it this position tenable?

The size of the pie

First we should look at the fiscal position. Buried underneath the controversy over the government’s social care reforms, the Treasury announced that the spending review – the plan for public spending over the next three years – will accompany the autumn budget on October 27 this year.

The problem is that given the impact of Covid-19, it said spending plans would be underpinned by a focus on “ensuring every pound of taxpayer funding is well-spent, so that we can continue to deliver the highest-quality services to the public at the best value”.

Departments have therefore been asked to “identify at least 5 per cent savings and efficiencies from their day-to-day budgets as part of these plans, which will be reinvested in our priorities”. And that’s in the context of those cancelled (postponed?) catch-up commitments in schools.

Remember, the write off costs of student loans feature in “current” thinking these days. And unlike the first part of the last decade, they have to jostle with other budgets inside the Department for Education – where there’s little love lost for a sector that trains up cancel culture warriors.

This may all be why, for example, Gavin Williamson used Universities UK conference to rehearse a dodgy finding in the Augar review that concluded that the amount spent on teaching “seemed low” while around “£1,000 was spent per student on corporate activities and around £500 per student on marketing”.

In any event, ministers are facing a rapidly growing cohort of 18-year olds, growing demand for higher education amongst them, and a stated political desire to concentrate more funding on the 50 per cent of students who don’t go to university than the 50 per cent that currently do – not least because the Conservatives’ new electoral coalition includes a raft of new seats in areas where university participation is less likely.

So despite Steve West’s protestations, Williamson’s UUK speech rehearsed both minimum entry criteria and put pressure on the Office for Students to set a high bar for minimum exit outcomes in its forthcoming consultation on Condition B3 (baselines for student outcomes indicator, arguing that anything less than 50 per cent on its “Proceed” measure would be “unacceptable”.

Interestingly, what Williamson didn’t do is suggest what has been all summer as the least worst option. Why might that be?

Quack quack oops

For some years, when concern has been raised at the level of debt that appears in the bottom right hand corner of graduates’ student loan statements, the convenient retort has been that it’s not really debt at all – it’s more of a tax. Mary Curnock Cook is even said to have once said to system-architect David Willetts:

If it looks like a tax, walks like a tax and quacks like a tax, perhaps we should call it a tax?”

There have always been those who argue that a traditional tax can’t just be avoided by those who pay upfront and nor can a proper tax be avoided by becoming really rich later in life and “paying it off” (although in truth perhaps it’s the case that one of the ways that the rich become rich is by being good at avoiding all sorts of tax).

But the general position has always been – look, you only pay when you’re benefiting, and the write-off means that it’s a progressive.

The trouble is that if you’ve spent a decade arguing that a large looking debt burden is really a small sounding tax burden, there’s then a problem when graduates suddenly look like they’re facing a massive tax burden.

In amongst the melee of the social care hike, the New Statesman’s George Eaton was first out of the blocks arguing that that the 1.25 percentage point rise in National Insurance means the UK tax burden has reached its highest rate since 1950 (35.5 per cent of GDP) – and that one “particularly squeezed” group is university graduates:

After what amounts to a 10 per cent increase in National Insurance for most taxpayers, graduates earning more than £27,295 will pay a marginal tax rate of 42.25 per cent once student loan repayments are included (20 per cent income, 13.25 per cent National Insurance, 9 per cent loan repayments).”

The the FT worked out that graduates like teachers or marketing executives earning £30,000 will only get half of any pay increases granted by their employers despite paying an income tax rate of 20 per cent:

If their salary goes up £1,000, they will pay £200 in additional income tax, £132.50 more employee national insurance, and £90 in extra student loan repayments. Their employer will pay another £150.50 in employer national insurance. The total tax payments on £1,150.50 in additional employment costs will therefore be £573, a tax rate of 49.8 per cent of the additional pay bill.”

None of the articles noted that a graduate with an undergraduate and a postgraduate loan will actually face marginal deductions of 48.25% on earnings over £27,295 – 20% PAYE, 9% UG loan, 6% PG loan, and 13.25% NI.

Later the Telegraph chimed in with the headline “Young graduates to pay 52pc effective tax rate after National Insurance rise”. You have to get several paragraphs in to realise that this applies to “young graduates” that earn between £50,270 and £100,000, but maybe that’s just how Telegraph readers roll.

Tellingly, buried in the piece is a quote from the Adam Smith Institute arguing that an increased tax burden on young people threatened to “destroy” their ability to “accrue the wealth” needed to own shares or homes or “pay their way”:

Tax rates at the levels we’re seeing cannibalise economic growth, and risk ruining the fortune of a whole generation while mostly white Britons of select classes inherit wealth ahead of them. It is a break of the social contract and fundamentally unconservative.”

And there’s the rub.

Beware the burdens

Having argued that student loans are really a graduate tax for years, that message is now starting to break through. And the truth is that the tax burden for graduates over the threshold is already higher than it has been for years – so much so that applying that higher tax burden to graduates earning £20k rather than £27k suddenly looks both genuinely painful for those shouldering it, and politically toxic given that both the left (who’ll argue such a move would be deeply regressive) and the right (who’ll argue that this kind of tax burden is unconservative) will be in agreement.

Add in the intergenerational distribution issues, the deep sense of injustice if the threshold was lowered on current borrowers, and the way these impacts are being felt by families whose offspring have moved back home having graduated – and what was thought to be a mere “tweak” all summer suddenly looks like a huge act of political stupidity.

That’s not to say that the government won’t attempt it – the fiscal position is too tough not to be tempted by some of the savings that changes to student loan terms would represent, and remember who makes up this government’s electorate. But those in the sector that thought that this was the way out of the funding hole that English higher education’s budget in DfE faces may need to return to the drawing board.

A decade ago, students and their families weren’t prepared to stand a (bigger) loan – and after the NI hike, they won’t stand for a further tax hike either. And I suspect both the Guardian and the Telegraph would agree.

3 responses to “Asking graduates to pay more may not be the little “tweak” we think it is

  1. I think there would be more of an argument not to increase the tax burden on graduates were it not for the fact hundreds of thousands of graduates already face that tax rate over £20k (anyone with a pre-2012 loan regardless of the size of the outstanding debt).

  2. You could add pension contributions to the marginal deductions – soon to be 9.8% for those of us working in higher education. Any reduction in the student loan threshold really will hit take home pay in a big way.

  3. I am not sure it is true that: “The tax burden for graduates over the threshold is already higher than it has been for years”. On the contrary, there has been a huge decrease in direct taxation and annual student loan repayments.

    Rewind to 2010 and a graduate earning £30,000 would have had a post-tax income of £21,276 and experienced an average tax rate of 29.1% (income tax personal allowance: £6,475 and basic rate of 20%, NI primary threshold:£5,736 and Class 1 rate of 11%, student loan threshold: £15,000 and repayment rate of 9%).

    After next year’s NI increase, you would have to earn £50,500 to experience the same average tax rate thanks to big increases in the income tax personal allowance and the student loan repayment threshold over the last decade (income tax personal allowance: £12,570 and basic rate of 20%; NI primary threshold: £9,594 and Class 1 rate of 12.25%; student loan threshold: £27,295 and repayment rate of 9%).

    Another example – a post-2012 graduate earning £35,000 in 2022/23 will take home £26,700. Someone earning the same real-terms salary in 2010/11 (£27,500 using CPIH) would have taken home the equivalent of £25,100 (inflated using CPIH) – £130 per month or 6% less.

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