Laura Whitcombe

Student loans are taxes in disguise, exclusive research for Spectator Money reveals

Student loans are taxes in disguise, exclusive research for Spectator Money reveals
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It’s ten years since I graduated and I’ve just managed to clear my student loan, which isn’t a bad achievement on a journalist’s salary.

The day I finished my politics and economics degree, my debt stood at £11,500. That covered the course and living costs for three years of study and a year spent in industry – for which I still had to pay half the annual course fee despite not setting foot on campus. In the years that followed, interest started to mount up and added another several thousand pounds onto my repayments.

I count myself lucky to have repaid my loan after such a relatively short period compared to how long it could take those graduating right now. Of course, I wasn’t lucky enough to have benefited from a free university education like my parents’ generation did but at least I was fortunate enough to have dodged the £9,000 annual fee my beloved University of Bath now charges.

Much has been written about the hike in the cost of university and how it’s putting a generation off studying. Just last month, an open letter on the subject from engineering graduate Simon Crowther to his local MP, Vernon Coaker, went viral. The Nottingham University graduate was one of the first wave of students hit by the annual £9,000 bill and had run up a student debt of around £40,000, excluding interest, by the time he completed his three-year course last summer. His letter detailed his shock at the speed at which the interest was applied.

Since graduation, on occasion Crowther's monthly interest charges have exceeded £180 and now, a year on, his loan has ballooned by more than £1,800. He was incorrectly under the impression that interest was only going to rack up at an annual rate of 0.5 per cent and thought the Government must have unfairly altered terms of his loan agreement.  He said he felt he had been mis-sold his loan. And despite the Student Loans Company confirming that all students, including Crowther, are made aware that interest accrues while studying at the RPI measure of inflation plus 3 per cent until the April after they graduate, and then at a rate commensurate with their earnings, some high-profile financial commentators quickly made further allegations of mis-selling.

Student loans are an emotive subject and there’s no consensus as to how to improve the system. If we want a university education to be free – with no fees and generous non-repayable grants – we’ll need to pay for that through the tax system. While I’d be happy to add a few per cent to my tax bill to contribute to this greater good, I think I’m in the minority and successive governments seem to agree. This is why the student loans system exists in the way it does. At present, those wishing to attend university have to pay for it.

But perhaps this Tory government has been trying to get us used to a student tax since it introduced the £9,000 tuition fees while in coalition? It’s done away with upfront fees altogether and research exclusively shared with Spectator Money by analysts at RedSTART shows that today’s student loan system works more like a tax than a loan for all but the highest earners.

‘A student loan is not a normal loan,’ explained Jonny Letham at RedSTART. ‘You only need to make repayments if you earn over £21,000 and then you pay a maximum of 9 per cent of every pound you earn over £21,000.

‘And 30 years after graduating, the whole loan will be written off, completely gone, and you’ll never need to worry about it again. What this means in reality is most people will not pay the full loan back – with no ramifications on credit worthiness.’

He says the most important factor is how big a drag (or tax) the repayments are on your income. And, contrary to many sensationalist headlines, it’s higher earners that end up with the greatest burden.

Based on a loan for a three-year degree at today’s £9,000 annual tuition fees and maximum maintenance loan outside London of £8,200, the student will borrow £51,600 before interest charges. Over the maximum 30-year repayment period and certain assumptions being made about future earnings, a graduate on a starting salary of around £20,000 will pay back a total of roughly £18,000, according to RedSTART. While someone on a starting salary of £30,000 will repay £77,000 and a very lucky grad on a first salary of £50,000 can expect to repay in the region of £106,000. While the highest-earning graduate would actually repay their loan in full in 22 years, their peer with the lowest starting salary never fully repays the loan and so in effect they pay an extra tax for 30 years.

What’s more, RedSTART found that in the year repayments are greatest for both the lowest and highest earner, the better-paid graduate pays proportionately more. Year 22 is when repayments peak for the higher earner, at 5 per cent of gross salary, compared to just 2 per cent in the peak year (year 30) for the lowest-paid graduate.

I don’t dispute for a moment that university is expensive but it’s a long-term investment. I wouldn’t be in the job I have today without it, neither would I have the life experience, best friends or husband I do (all of whom I met at Bath). So I would urge anyone considering not going to university based on scaremongering stories about the costs involved to look at the bigger picture.

As Letham said: ‘Repayments are really not as scary as the headlines with the higher earners paying off the full loan and lower earners making lower repayments over a maximum of 30 years.

‘So although it may seem unfair to have to pay thousands of pounds for an education that was free or cost a lot less in the recent past, given the opportunities that you can gain with a university degree, the financial implications alone should not be enough to put you off.’

Laura Whitcombe is knowledge and product editor at