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Hello and welcome to Merin Talks Your Money, the personal finance edition of Merin Talks Money. In these bonus podcasts, we talk about the best strategies for making the most of your money. I'm Meri in Sumset Web and with me today senior reporter and Money Distilled author John step Back here, John, Hi.
Mel.
Okay, John.
So this week we are tackling a topic that you and I have talked about a lot over the years, and everyone else has finally noticed. It is student loans. Now, there's rising graduate debt levels, there's lots of pressure refer reform. Might there be some possibility of change in the current system, and what might.
It look like.
We'll get onto that in a minute, but let's just talk about what is happening here. I mean, there're a variety of different kinds of student loans. I can't even remember how many other five different types of student loan depending on when you took it out. But the one that's really causing ructions at the moment is the Plan two, which I think runs from people who were at university between twenty twelve and twenty twenty two. Just correct me when I'm wronger better on detail than I am.
No, No, it's way too over that, okay.
But whatever your plan, you end up paying effectively nine percentage points extra in tax above the repayment threshold. And we've talked about that over the years because we think it's part of the thing that disincentivizes people from working. We think it's more from taking promotions at least, we think it's one of the things that makes life so very, very difficult for the young in the UK because they're
paying a phenomenally high effective rate of tax. You know, you think you think maybe you've just gone over the forty percent threshold, but in fact your new tax rate is fifty one percent by the time you've taken into a gang student loan and national insurance. And this seems kind of shocking, particularly as for the majority of people it's going to be with you not just for five years, ten years, twenty years, but maybe thirty years, probably thirty years.
And of course on the newest plan, which is a Plan five, I think it's forty.
Years, not thirty years.
And people are suddenly beginning to notice that this is a really shocking burden to have to carry for your entire working life. But I suppose the first question I want to ask is why do you think people are noticing now when we've been talking about it for years.
I think it's like a lot of these things, it's only when they're critical master people have been actually pummeled by it. I think wine issues because obviously these the Plan two started in twenty twenty elve, So the canes of people who graduated and see twenty sixteen going to be in the kind of like thought, these no starting families working in can of metal management get into the bit of their career where they feel that they should be young and enough to buy a house and start family.
Quite how few of those people are working in the media, you know, so the good columns in the Times or whatever, and they're starting to know is the hotel a minute? Like, I'm a forty percent taxper but yes, I'm paying fifty one percent on top of that, I'm paying in my auto enrollment pension and basically there's nothing left for me at the end of the day. And I thought that things were going to be easier by now. So I
guess they've just started. And also of course they've getting a letter you know, from the student Launch Company every year, and they're kind of looking at and they're thinking, wait a minute, oh, at least as much as I did the I graduated in that was a decade ago.
Yeah.
I think that's one of the really interesting things about it, isn't it is that you know, people keep saying, oh, don't worry about it.
It's not a big deal. You know, if you don't have enough money, you know, I'm paid off. It's not like a real debt. It's not like a real debt. It's just a graduate contribution.
Is Martin Lewis, and I strongly disagree with most of what he says about the student lives, but he keeps referring to it as a graduate contribution, and it really, you know, it's just it's not that big a deal. It's not like a real debt. But if you get a letter every year telling you that you are pounds fifty thousand pounds sixty seventies eighty pounds and that worse, even though you've been paying it off for all year,
or you think you have. At the end of the year, because the interest rate is very high, you may own more at the end of the year than you did at the beginning, despite the fact that you felt you paid some off. Yeah.
And I think the other problem is that, I mean you've said this before, but there's the psychological building of having that hanging over you. Yeah, if people were going to union and the people were complaining about this. Also people who consider themselves to be high achievers and so they sort of see this inability to pay this debt off as some kind of personal failure. But also, I mean is more than just psychological, it's a huge financial
planning issue. Yeah, Because you know, we talk about retirement. So the big problem with retirement is that you's fundamentally full of uncertainties. And the main uncertainty is obviously you don't know when you're going to die, and you do not know the partner of your spending between the time you retire and the time that you cannot pass away.
And student loans a a lot like that. It's like, if you wanted to know what you should do with your student loan, you would have to have perfect certainty about the way that your earnings were going to work. And not only that, your earnings and your life events. I mean, like good example is you know what happens if you have kids. You know, you might be a high flying can I graduate at kind of twenty nine
thirty doing well? But what if you'd say to take a career break and then you decide, well, actually, you know after kind of a year on maternity or paternity leave that I said, I'm going to be the one that stays home and looks after the kids. When a couple of years, that's completely different decisions you should make on your student loan.
Man, in terms of whether you should take a loan or not, whether you should try and get your parents to pay it at front, or how you should do everything.
Yeah, well the exactly kind of the financial SIDEA is kind of night marriage from that point of view, because at the end of the day, if you if you were to just leave your nie and then not get a job at all, then yes, it would be pointless to pay by your student loan because we're paying back sixty thousand pound OIDs and you would never ever, actually I've had to repay that, John.
I suppose, unless you felt you had a duty to other taxpayers.
To pay your way.
I feel that we've already demonstrated that is not the case. You cannot lie on your human beings for that.
No you can't.
I mean, I suppose when when people look at it and say, well, it's not like a real loan, it's you know, it's a lump sum that you might never pay off, and so in the end that maybe a very large number of people will never pay back where they borrow.
So watch the problem.
I think that that's a confusion, isn't it, between effectively stock and flow.
Right, You're still.
Paying nine percentage points extra every year, and that's a massive burden, regardless of what the big number is, whether you're paid off or not.
But also, I mean the other thing is the reason they keep changing it. I think this is that says actually important is that the government is then increasing the number of people who do endor promently pay it bus And I think that's it, because you're really people started obviously oh well it's not a real loaning and it doesn't matter that much anyway. But the closer it gets to being something that will likely not this is just a summer money that you have to pay off over
your work in lifetime. You know, you can no longer kind of keep dismissing it like that. I mean a law Plan two is when people are complaining about Plan five, actually moves it much further along that way, the interest rate doesn't look as ugly, but the fact you have to pay over forty years thirty means that far more people are going to end up paying the whole thing.
Yeah, and I think people are beginning to notice some of the unfairnesses here. And one of the things that you hear people now talking about over and over again with the Plan two loans and the Plan vied by the way, is that the interest rate is based on RPI, not CPI. Now the government uses CPI for almost everything because they no longer consider RPI to be a reasonable
measure of inflation. But of course when it comes to money that the government has keen to receive, it's much better for them to use RPI because it generally comes in about one percentage point higher than CPI. So if you say we're all student loans are based the interest rate is based on RPI, that brings in a lot more money, but also it's kind of unfair because it's
not used for any anything else. And then if you look at Plan five EI, the one that most recent students are on, the interest rate is just RPI.
That's it. You pay back over.
Forty years, right, but Plan two it's your RPI. And then in a sort of bount of extraordinary progressiveness, because the UK tax system is one of the most progressive in the world. I don't think people grasp that very often, but this is yet another example of why this is a tax, not alone and not just a tax, but.
A very very progressive tax.
The interest rate you pay goes up as you earn, more so at the bottom.
Of the threshold.
When you go over that threshold and forum type two loans, it's just over twenty eight thousand, isn't it twenty eight than four hundred ish pout At that.
Level you just pay RPI.
By the time you get up to the top, you're playing RPI plus three percentage points.
So these interest rates are.
Very high and that doesn't seem quite right.
Yeah, And to be clear, the top is just fifty one tho, so it's the bottom of the forty percent tax bracket.
And the other on fairness that I think people have now noticed is this business of the threshold being frozen. So the moment we just said it's over twenty eight thousand, the current threshold. It's going to be moved up to twenty nine thousand, three hundred and eighty five pounds from April twenty twenty seven, but then frozen for three years.
And this brings us into fiscal drag, which people perfectly reading me say, is not something that should be used in this context to let them inflation deal with the problem. So if you've been listening to government ministers talking about this recently and Rachel Ruths herself talking about it, one of the things they say is, oh, well, you know we're keeping an eye on this. I know we're watching it. No idea, you know, poor people, et cetera. But but
we've got a lot of stuff to pay for. And suddenly you look at this and you're like, yeah, that's a tax. That is a tax. They're shifting the goalposts all the time in order to increase the revenues from it, as if it were a tax to you know, have it help pay for other things, et cetera. So that's obviously absolutely maddening for people with this dat.
Yeah, and it's also worry because as soon as it gets recognized in that way, then the direction just keeps moving towards it. Being attacks. It's one thing, you know, we'd be sitting and we talk about how should you pay for this? How should you think about paying for this? And in an ideal world, yeah, you would have you know, like the resources that appearents would have the resources to actually just pay for it up front and it wouldn't
be something you had to worry about. But I think we now have to think about getting a degree as is it actually value for money in a way that you didn't have to whenever we went to UNI because it didn't ultimately cost as much or anything at all dependent Whereas now we young people don't have that luxury anymore. You know. It basically is this thing worth paying sixty grand for? You know? And that's that then moves away from the university experience of you know, getting away from
your hometown and meeting new people and our rest. Well, you can do that in other ways aren't going to
cost you that kind of money. So that thing is something that's to be seriously kind of thought about, as opposed to all these people you see trotted out on newsnight and all the rest of it, who went to UNI in nineteen seventy five or whatever, when somebody paid them to do it, and they can waft on about how oh yeah, it's all about you know, can I the enlightenment and learning and education for the sake of it? You can't. That's no longer a luxury that we've got.
No, And it's interesting that when you were talking about it just now, you said, is it worth sixty four grand, sixty five grand, seventy grand? And I would say the other way around, I'd say, is it worth nine percentage points of extra tax for your entire working life?
Yeah? I mean that too. I mean I think the only benefit to say in sixty grand is because it actually puts a figure on it up front, becaus I think a lot of people, until you're actually paying that nine percent, you're not aware of just how brutal that is in terms of extra tax.
So, okay, onto the real questions. Now.
We've done a podcast before you and I on whether, if you can afford it, you should pay for your kid's education upfront, and I think you know, we came down on the side of, well, all right, it depends if you have plenty of money and you want to re leave your child of that psychological burden. Absolutely, if you have a limited amount of money, are you better off putting it into a house deposit for them later, or putting it into a pension for them or into an ISA for them, etc.
So choices, choices, choices.
And we can't really have a clear view for any individual, can we?
Unfortunately not? I mean again, I think this is kind of the problem with it being being more lake attacks than a day, because it's always going to be fating as a priority with all the other things that you need to pay for, and so many of those things are higher priority of like buying the host. You know, if you could got a choice doing pay an extra to your student there or saving not for the hosing deposit, that really isn't any coin test there, because what where's
the money for the house? Can they come from? If you've whacked any of the student loan? Obviously emergency find needs to be a built up before even considered any of this.
And then pension, well, hundred percent mortgage you one hundredercent mortgage and you've got a higher cash flow, makes it easier to get a mortgage.
I mean that's true. You could, yeah, if you want to, you could assume that you can get wine, but then you play get two expensive forms of a day coming out of something your finances if your mind.
Yeah, okay, So how do we solve this problem?
Now? Coming back has been out saying let's get this interest right down, cut it down, and.
That will help.
But of course it only helps to a certain degree, because even if you're playing a significantly lower rate of interest, you might still end up paying the ninet percentage points for the rest of your career. So the other side of this Martin Lewis argument is that the threshold should be higher, significantly higher, and that would make the difference. My own view is that they're both wrong, because that's a good way to go with this kind of thing.
And then in fact, the best thing to do would be to you know, maybe.
I don't really know about the threshold. Thousand pounds, ye, thousan pounds. There is not going to make much difference people over a career, but it would make sense for there to be really no interest rate on it at all. Just pay it back in nominal terms and be done with it.
Then we're subsidizing.
Education to a degree, to a degree, but they're still repayment.
That would work.
And the other possibility and you know, I would really go great guns with this one. This would be my absolute topic. Absolute topic would be to work a little harder to create an economy that creates an awful lot of high income jobs so that paying this debt off isn't such an extraordinary burden. A world where people don't aspire to earning forty two thousand pounds but are pretty sure that if they'd really do well, they'll be earning one hundred and seventy that's the actual answer, right.
Yeah. There's a journalist of and the Ft joined Burden mud Duck who did a really good piece on Yes, and they basically pointed out that the UK is the only place where the graduate premium has gone down, even the low student participation has gone up in loads of different countries. So it's not just as I know. To
be fair, I fell into this a bit. I thought, it's because we get so many graduates now that the graduate premium has gone down, but just as an echo that helps, we are including places like you know, the US and Australia. And his point is basically it's just because they've produced the decent, high paying jobs that had enough graduate jobs to go around.
Growth low growth and live productivity. And that's why people care about these loans so much. That's why they're such a purdon is because we can't create the high income jobs to pay them off easily, to make them in nothing. Maybe will be able to brush them off and say, well, that'll be gone by the time I'm thirty four.
I'm all good.
It's so so interesting because employers are always complaining about how we don't have a skilled enough workforce, and that's why we need to import lots of people. But as tons of we see me have an ordnly qualified workforce, but who employers can pervade the jobs. So that's a sort of interesting Say they're shoe, they are. But perhaps when we can tackle another do yeah.
Anyway, So I suppose what we come down to here is will there be reformed? Very probably? I would expect somebody to do something quite soon. There are well over five million people on that type two of student loan, and so that's that's quite a big voting block right there.
So someone will want to do something for them. But I strongly suspect that whether we talk about putting the threshold up by a couple of grand or reducing the interest rate a little bit, or making the interest rate maybe even less progressive, so everyone pays the same rate regardless of income whatever something like that. But in the main, that's not going to make the difference. What's really going to make the difference is not having less to pay back,
but earning more. So it doesn't feel such a burden. And I don't see and maybe you have a different view, but I don't see that coming down the tracks anytime soon.
Well, yeah, it's just added too Bretons can a long list of huntly unsolvable problems that could always sort of if we just did slightly cheaper energy.
That would be that would go quite a long way, John, quite a long way, right.
We don't want to get into a different conversation.
And I am sorry, students, I don't feel that we have offered you a lot of hope here.
If you are about to go to unique look things like apprenticeships as well or instead you would like just just think about your options. I'm not saying don't go, but you may be have to think about it with a slightly harder head than a lot of people around you are encouraging you do.
Thanks for listening to this week's Marren Talks Your Money.
If you like our show, rate review and subscribe by every listen to podcasts. Also we show to follow me and John on ex putt at Marinus w and John Underschool Stepic. This episode is produced by Sammersadi and Moses and questions and comments on this show and I think on this money you will have questions and comments and on all our shows are always.
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