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Why cutting student loans only benefits graduates with a starting salary of at least £35,000

by jamesbaker on 2 March, 2015

By promising to cut tuition fees to £6,000 a year Ed Milliband appears to have provided a great opportunity for me to explain how the new tuition fee system is essentially a graduate tax.

That which we call a rose

By any other name would smell as sweet;

The reason this scheme is essentially a graduate tax is simple, the amount you have to pay back is not the same as the amount you have to borrow. You only start paying back your fees when you are earning over £21,000 an amount at which you can afford some repayments. You then repay a 9% on any income above that repayment threshold of £21,000 for 30 years. If you never earn over £21,000 you don’t have to pay anything, University for these people is free. If however you benefit financially with a better job and earnings you pay back more. Top earners will pay back significantly more than low earners. Hence it’s a progressive scheme, that provides universities with the funding they need, and ensures those with the broadest shoulders pay the most back.

If you do as Labour propose and simply cut the amount of tuition fees then it only benefits higher earners who would have paid back all they borrowed within 30 years. Don’t just take my word for it though, the independent financial expert Martin Lewis who runs the famous Money Saving Expert website has this to say:

“The only people who would gain from it are those who would clear their entire loan for tuition fees plus any loans for living costs, plus the interest, within the 30 years. To do this you’d need to be a high earner.

“To see the exact amount, go to my student finance calculator and play about with different scenarios – watching the impact of reducing tuition fees. It shows that only those with a STARTING SALARY of at least £35,000 – and then rising by above inflation each year after – would pay less if you cut tuition fees (we have assumed the student also takes out £5,555 in maintenance loans per year).

“That’s a very high amount, mainly only City law firms, accountancy firms and investment banks pay that much as starting salaries. Is that really who Labour wants to target with this plan? Worse still, by cutting tuition fees it will reduce the bursaries that universities can give to attract poor students.”

Miliband’s policy simply doesn’t work. Even if you think more should be done to help poorer students then this is a bad way of spending £2.5Bn (which could be spent on the NHS). As is so often the case Labour have gone for an attention grabbing headline rather than a credible financial policy.


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