Student loans will take 40 years to repay... as wealth continues to move from young to old

A stealth tax on students in England, said Labour of the government’s planned reforms of student financing, and that is indeed what it amounts to.

A complicated one, for sure, with some sugar to help the medicine go down. Annual fees will be frozen at £9,250 for another two years and student loan interest rates are being cut to match the retail price index (RPI).

The flip side is that school leavers who go on to higher education will be making repayments for up to 40 years, rather than a maximum of 30 at present. The income level at which they start will also be reduced from £27,295 to £25,000.

The aim of these changes, which are part of the government’s response to the Augar review of post-18 education, is to increase the number of students paying off the full amount, while also correcting some of the unintended consequences of the original decision to treble student fees in the first place.

I’m going to leave the discussion of the education policy to others and focus instead on the gorilla in the room: the economics.

Consider the lower repayment threshold for starters. The reforms mean that the entry point for repayment is going to come in at a good £6,000 below the median average wage at a time when the value of wages is being rapidly eroded by the cost of living crisis.

The soaring CPI inflation politicians and central bankers are rightly worried about – there was much discussion at Wednesday’s Treasury Committee hearing of the Bank of England’s dropping of the word “transitory” – doesn’t factor in the cost of housing. RPI does, and has historically been higher. Rents, which were suppressed during the pandemic, have started to rise, and fast.

Those with wealthy parents, who’ve saved for them as often happens in America, may be cushioned from the blow. So will those who embark on certain types of career; the bankers, the fund managers, the business types, the tech whizz kids. But who’d start a career in, say, teaching, or nursing, or one of the other very necessary occupations which offer more modest financial rewards knowing just how modest those are going to be now? Especially after years of falling pay in real terms?

Student “loans” are looking more and more like a graduate tax on those lower earnings, and a profoundly regressive one.

Defenders of these changes would argue that, yes, ok, but even with roughly half of school leavers moving on into higher education, they’re still disproportionately from more fortunate demographics. They also do better over the course of their careers than their non-graduate peers, which is the point of the exercise.

Quite apart from the discouraging effect on young people from poorer backgrounds the reforms could have, what that argument ignores is the role this policy plays in the vast and ongoing transfer of resources from the young to the old that has been taking place roughly since the financial crisis of 2007-08.

The process got started with austerity, when the support for the elderly, up to and including some of the richest pensioners in Britain, was protected even as services used by the young were cut to the bone.

Theresa May rightly recognised that Britain faced an issue of intergenerational fairness as a result of this and that measures ought to be taken to address it, even if she didn’t get very far with them. The very idea now seems to have been jettisoned, along with competent governance and even the rule of law.

The transfer, meanwhile, continued through the course of the pandemic. Those of us with miles on the clock were at the sharp end of its depredations from a health perspective. But the economic burden fell disproportionately on the young, whose taxes are now also rising to pay for the health service and social care their parents and grandparents require.

Against that backdrop, this latest wealth transfer adds insult to injury, especially from the perspective of those unable to call upon the support of the Bank of Mum and Dad.