Graduates face ‘midlife tax crisis’ on loans

Thousands of graduates of English universities will suffer a “midlife tax crisis” caused by student loan repayments, a new analysis suggests.

Warning that higher-earning graduates face an effective tax rate of 51 per cent throughout their thirties and forties thanks to debts incurred at university, the report by London Economics for the University and College Union explains how those entering different professions will be affected at various phases of their career.

A male engineering graduate on £45,000 a year or more, for example, will face a marginal tax rate of 51 per cent from the age of 33 through to 47 once tax, national insurance contributions and loan repayments are deducted from his salary, says the report, The Impact of Student Loan Repayments on Graduate Taxes, published on 20 July.

Those in other professions with earnings below this level might escape the higher tax rate but will end up repaying a larger total sum than higher-earning peers, says the report. That is because interest on student loans – which will rise to 6.1 per cent in September – will continue to accrue before arrears are written off after 30 years under current rules.

In cash terms, where the loan repayment values are adjusted to reflect today’s prices, a male school teacher will pay a total of £121,000 over his working life and a male nurse £133,000 – more than an IT professional (£106,000), a lawyer (£85,000) or a finance professional (£86,000), it explains.

Female graduates will pay even more in debt repayments owing to career breaks in many professions as interest continues to accrue, the report explains.

Female high earners do particularly badly in terms of length of time on the higher marginal tax rates: a high-earning female medic would spend 22 years (between the ages of 29 and 50) on the 51 per cent marginal rate while a male colleague would be on it for just 17 years, according to the report.

Sally Hunt, general secretary of the UCU, said that the report “exposes how there are no winners under the current student loan system, just different ways to lose”.

“As some better-paid graduates reach their thirties and forties, they will be hit with marginal tax rates of 51 per cent, while men on lower salaries working in our public services like teachers, nurses and social workers will never pay their debt off fully and will end up paying more money back in total,” Ms Hunt said.

She argued that these higher effective tax rates would deny graduates “money [that] should be going into saving for retirement, towards a mortgage or even starting a family”.

She added that it was “no wonder [that students and graduates] are so angry with the politicians who created such a deeply unfair system”.

Gavan Conlon, a co-author of the report, said that the analysis undermined claims that the current loan system was progressive because “there are many relatively less well-off graduates in key worker roles who contribute a higher proportion of their earnings to student loan repayments than many more highly paid graduates”.

“At a time when there is a crisis in teacher and nurse recruitment, these workers, upon whom almost everyone relies, should be offered incentives to enter these professions rather than the current approach, which appears to penalise workers for the entire duration of their working lives,” Dr Conlon said.

The report’s other co-author, Maike Halterbeck, from London Economics, said that the analysis provided “robust evidence of the impact of the current fees and funding” regime and should prompt an “in-depth review” of the current system “as soon as possible”.

jack.grove@timeshighereducation.com