“It is not right that people who don’t go to university are having to bear all the cost for others to do so,” Rachel Reeves remarked this week, amid the increasingly angry row about student loans.
But if something is “not right” here, it’s the complex and confusing loan system, and the debt burden borne by some recent graduates of English and Welsh universities.
Since the chancellor slapped a three-year freeze on the repayment threshold for Plan 2 loans at November’s budget – covering students whose courses kicked off in the decade following 2012 – longstanding frustration about the system has erupted into full-blown fury. The personal finance guru Martin Lewis told Reeves recently: “I do not think this is a moral thing for you to do.”
After the threshold freeze, the latest annual report on education spending in England from the Institute for Fiscal Studies (IFS) forecast that for the 2022-23 intake, for example, “the long-run cost of issuing loans … will be negative, with graduates repaying more than they borrowed”.
Once direct grants from the government to universities were included, the thinktank said, taxpayers would have funded approximately 3% of the cost of higher education for these post-Covid students, who would have to bear the other 97% themselves.
That is a very long way indeed from Reeves’s reasonable argument that non-graduates should not have to “bear all the cost” of their neighbours’ higher education.
When Labour introduced tuition fees and the Tory-Lib Dem coalition later tripled them, public debate focused on the idea of graduates making a financial contribution.
Somewhere along the way, that seems to have morphed into graduates meeting almost all of the cost themselves, a quiet abandonment of the idea that having an educated workforce might have wider social and economic benefits.
Once students reach the earnings threshold, set at £29,385 from April, Plan 2 graduates pay 9% of any additional salary each month towards their loan, while the amount they owe may continue to rise, due to hefty interest rates.
This amounts to a graduate tax in all but name, continuing for up to 30 years for those who never earn enough to get ahead of the accruing interest.
Treasury-brain types confronted with complaints about high interest rates tend to argue that the value of the loan barely matters, because what’s left of it will be written off anyway after 30 years if not repaid (or for the post-2023 cohort, 40 years, meaning more of them will ultimately end up repaying in full).
For that reason, Lewis advises most Plan 2 graduates not to bother paying off chunks of their loan upfront, because repayments will remain at 9% regardless – and unless their earnings are set to rocket, they’ll most likely not pay it all off anyway.
But that leaves many with no flexibility or control over how and when their loan is repaid, which feels unfair.
And as experts including Dan Neidle, of the consultancy Tax Policy Associates, have pointed out, it contributes to very high marginal tax rates, creating terrible incentives for graduates to take the next step up the career ladder.
Labour’s defenders can rightly point out that the government did not design the student loan treadmill, and inherited a higher education system whose funding model is bust.
It has allowed more investment into the sector by letting tuition fees rise with inflation, and will reintroduce maintenance loans for lower-income students.
But freezing the repayment threshold will make a bad situation worse, for a cohort who emerged from university to face a tricky labour market and an all but insurmountable housing ladder.
If they are lucky enough to earn more in the years ahead, they will also be dragged into the higher tax bands sooner than would otherwise have been the case, because of Reeves’s main revenue-raising move in November: the income tax threshold freeze.
Jeremy Corbyn’s Labour, for all its many faults, instinctively understood the need to enthuse the youngish, educated supporters who remain a key constituency for the party.
The pledge to scrap tuition fees was one aspect of that – and one which Keir Starmer adopted as part of his continuity Corbyn leadership campaign in 2019, before backing away from it four years later.
Realism in the face of the UK’s tough fiscal position was part of Starmer’s brand, as he and Reeves battled to regain their party’s economic credibility, and the £11bn-a-year cost of nixing tuition fees could be spent more progressively.
But that need not have precluded easing the burden on graduates who feel they are getting a raw deal.
It is not immediately obvious what Labour’s offer is for this group, apart from the promise not to drive the economy off a cliff, alongside the bare fact of not being Nigel Farage.
There is plenty to celebrate in Labour’s green agenda, for example – but Ed Miliband’s clean energy drive has been repackaged as saving a few quid on household bills, dialling down the emphasis on tackling the climate emergency. And the party’s harsh rhetoric on migration is not likely to have enthused leftish graduates. Neither is the slashing of overseas aid.
But it may become clear all too soon that neglecting this group – or targeting them, as with the loan threshold freeze – has costs. As the elections expert Rob Ford has pointed out, the Denton and Gorton constituency where this month’s parliamentary byelection will be fought, has more than its fair share of young voters and graduates, and Zack Polanski’s Greens fancy their chances.
