Attended university since tuition fees were raised? You have a graduate tax in all but name

In 2012 the Lib-Con coalition implemented a fiercely controversial increase to student tuition fees. The two main parties were determined to reform university funding. Labour, under Ed Miliband, proposed the ‘graduate tax’ – a special tax levied exclusively on graduates.  The government fought to raise tuition fees to £9,000 per year, which would be balanced by introducing a ‘fairer’ student loan system. For all the controversy surrounding the rise in fees, the end result was a graduate tax disguised as a student loan.

The new repayment model was touted as a better deal for students because, in the beginning, graduates would pay less than their pre-2012 counterparts with Plan 1 loans. Student loans are paid like income tax, with 9% of a borrower’s earnings above a certain threshold being automatically deducted by HMRC. The new repayment scheme saw that threshold rise from £17,495 to £21,000, meaning your average graduate on a starting salary of £20,000 would now pay nothing, whilst their Plan 1 counterparts would pay 9% on £2,505 of pre tax annual income. This was the government’s big selling point for why the Plan 2 system was fairer. Labour’s graduate tax was rejected as being un-aspirational – a lifetime tax rather than the repayment of a loan.

Therein lies the contradiction. The overwhelming majority of Plan 2 graduates will never repay their student loan for two reasons: the enormity of the debt and, crucially, the above inflation interest rates being applied to that debt. This means they will be saddled with an extra 9% tax for most of their working lives, almost identical to what Labour had proposed.

When Plan 1 loans were introduced the deal was that students would pay for their own tuition but the government would issue low interest rate loans. In other words, nobody would profit from their debts. No such niceties were granted to Plan 2 graduates. In 2016, Plan 1 loans were accumulating interest of 1.25% (now frozen indefinitely) whilst Plan 2 loans were incurring 4.6% interest (RPI + 3%). That is more than 3.5 times more interest! Such large interest rates mean that almost all Plan 2 graduates will be incurring interest faster than they are paying it off. Many – even average earners with small debts – will never make a dent in their student loan debt. The debt will increase until it is written off 30 years down the line.

For pre-2012 students? Earn an average salary and your loan will be paid off. Earn good money and you will be debt free in your thirties. That cannot be said for all but the very highest earning of Plan 2 graduates.

The chart above shows the repayment schedule for an average earner with a Plan 2 loan. Even after 30 years the debt is still increasing.



2 Replies to “Attended university since tuition fees were raised? You have a graduate tax in all but name”

  1. I think we all knew the “better deal” wasn’t actually a better deal. Still, never remember hearing about the interest rates at the time

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