Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: Hello and welcome to Merin Talks Your Money, the personal
Speaker 2: finance edition of Merin Talks Money. In these bonus podcasts,
Speaker 2: we talk about the best strategies for making the most
Speaker 2: of your money. I'm Meri in Sumset Web and with
Speaker 2: me today senior reporter and Money Distilled author John step
Speaker 2: Back here, John, Hi.
Speaker 3: Mel.
Speaker 1: Okay, John.
Speaker 2: So this week we are tackling a topic that you
Speaker 2: and I have talked about a lot over the years,
Speaker 2: and everyone else has finally noticed. It is student loans. Now,
Speaker 2: there's rising graduate debt levels, there's lots of pressure refer reform.
Speaker 2: Might there be some possibility of change in the current system,
Speaker 2: and what might.
Speaker 1: It look like.
Speaker 2: We'll get onto that in a minute, but let's just
Speaker 2: talk about what is happening here. I mean, there're a
Speaker 2: variety of different kinds of student loans. I can't even
Speaker 2: remember how many other five different types of student loan
Speaker 2: depending on when you took it out. But the one
Speaker 2: that's really causing ructions at the moment is the Plan two,
Speaker 2: which I think runs from people who were at university
Speaker 2: between twenty twelve and twenty twenty two. Just correct me
Speaker 2: when I'm wronger better on detail than I am.
Speaker 3: No, No, it's way too over that, okay.
Speaker 2: But whatever your plan, you end up paying effectively nine
Speaker 2: percentage points extra in tax above the repayment threshold. And
Speaker 2: we've talked about that over the years because we think
Speaker 2: it's part of the thing that disincentivizes people from working.
Speaker 2: We think it's more from taking promotions at least, we
Speaker 2: think it's one of the things that makes life so very,
Speaker 2: very difficult for the young in the UK because they're
Speaker 2: paying a phenomenally high effective rate of tax. You know,
Speaker 2: you think you think maybe you've just gone over the
Speaker 2: forty percent threshold, but in fact your new tax rate
Speaker 2: is fifty one percent by the time you've taken into
Speaker 2: a gang student loan and national insurance. And this seems
Speaker 2: kind of shocking, particularly as for the majority of people
Speaker 2: it's going to be with you not just for five years,
Speaker 2: ten years, twenty years, but maybe thirty years, probably thirty years.
Speaker 2: And of course on the newest plan, which is a
Speaker 2: Plan five, I think it's forty.
Speaker 1: Years, not thirty years.
Speaker 2: And people are suddenly beginning to notice that this is
Speaker 2: a really shocking burden to have to carry for your
Speaker 2: entire working life. But I suppose the first question I
Speaker 2: want to ask is why do you think people are
Speaker 2: noticing now when we've been talking about it for years.
Speaker 3: I think it's like a lot of these things, it's
Speaker 3: only when they're critical master people have been actually pummeled
Speaker 3: by it. I think wine issues because obviously these the
Speaker 3: Plan two started in twenty twenty elve, So the canes
Speaker 3: of people who graduated and see twenty sixteen going to
Speaker 3: be in the kind of like thought, these no starting
Speaker 3: families working in can of metal management get into the
Speaker 3: bit of their career where they feel that they should
Speaker 3: be young and enough to buy a house and start family.
Speaker 3: Quite how few of those people are working in the media,
Speaker 3: you know, so the good columns in the Times or whatever,
Speaker 3: and they're starting to know is the hotel a minute? Like,
Speaker 3: I'm a forty percent taxper but yes, I'm paying fifty
Speaker 3: one percent on top of that, I'm paying in my
Speaker 3: auto enrollment pension and basically there's nothing left for me
Speaker 3: at the end of the day. And I thought that
Speaker 3: things were going to be easier by now. So I
Speaker 3: guess they've just started. And also of course they've getting
Speaker 3: a letter you know, from the student Launch Company every year,
Speaker 3: and they're kind of looking at and they're thinking, wait
Speaker 3: a minute, oh, at least as much as I did
Speaker 3: the I graduated in that was a decade ago.
Speaker 1: Yeah.
Speaker 2: I think that's one of the really interesting things about it,
Speaker 2: isn't it is that you know, people keep saying, oh,
Speaker 2: don't worry about it.
Speaker 1: It's not a big deal. You know, if you don't
Speaker 1: have enough money, you know, I'm paid off. It's not
Speaker 1: like a real debt. It's not like a real debt.
Speaker 1: It's just a graduate contribution.
Speaker 2: Is Martin Lewis, and I strongly disagree with most of
Speaker 2: what he says about the student lives, but he keeps
Speaker 2: referring to it as a graduate contribution, and it really,
Speaker 2: you know, it's just it's not that big a deal.
Speaker 2: It's not like a real debt. But if you get
Speaker 2: a letter every year telling you that you are pounds
Speaker 2: fifty thousand pounds sixty seventies eighty pounds and that worse,
Speaker 2: even though you've been paying it off for all year,
Speaker 2: or you think you have. At the end of the year,
Speaker 2: because the interest rate is very high, you may own
Speaker 2: more at the end of the year than you did
Speaker 2: at the beginning, despite the fact that you felt you
Speaker 2: paid some off. Yeah.
Speaker 3: And I think the other problem is that, I mean
Speaker 3: you've said this before, but there's the psychological building of
Speaker 3: having that hanging over you. Yeah, if people were going
Speaker 3: to union and the people were complaining about this. Also
Speaker 3: people who consider themselves to be high achievers and so
Speaker 3: they sort of see this inability to pay this debt
Speaker 3: off as some kind of personal failure. But also, I
Speaker 3: mean is more than just psychological, it's a huge financial
Speaker 3: planning issue. Yeah, Because you know, we talk about retirement.
Speaker 3: So the big problem with retirement is that you's fundamentally
Speaker 3: full of uncertainties. And the main uncertainty is obviously you
Speaker 3: don't know when you're going to die, and you do
Speaker 3: not know the partner of your spending between the time
Speaker 3: you retire and the time that you cannot pass away.
Speaker 3: And student loans a a lot like that. It's like,
Speaker 3: if you wanted to know what you should do with
Speaker 3: your student loan, you would have to have perfect certainty
Speaker 3: about the way that your earnings were going to work.
Speaker 3: And not only that, your earnings and your life events.
Speaker 3: I mean, like good example is you know what happens
Speaker 3: if you have kids. You know, you might be a
Speaker 3: high flying can I graduate at kind of twenty nine
Speaker 3: thirty doing well? But what if you'd say to take
Speaker 3: a career break and then you decide, well, actually, you
Speaker 3: know after kind of a year on maternity or paternity
Speaker 3: leave that I said, I'm going to be the one
Speaker 3: that stays home and looks after the kids. When a
Speaker 3: couple of years, that's completely different decisions you should make
Speaker 3: on your student loan.
Speaker 2: Man, in terms of whether you should take a loan
Speaker 2: or not, whether you should try and get your parents
Speaker 2: to pay it at front, or how you should do everything.
Speaker 3: Yeah, well the exactly kind of the financial SIDEA is
Speaker 3: kind of night marriage from that point of view, because
Speaker 3: at the end of the day, if you if you
Speaker 3: were to just leave your nie and then not get
Speaker 3: a job at all, then yes, it would be pointless
Speaker 3: to pay by your student loan because we're paying back
Speaker 3: sixty thousand pound OIDs and you would never ever, actually
Speaker 3: I've had to repay that, John.
Speaker 2: I suppose, unless you felt you had a duty to
Speaker 2: other taxpayers.
Speaker 1: To pay your way.
Speaker 3: I feel that we've already demonstrated that is not the case.
Speaker 3: You cannot lie on your human beings for that.
Speaker 1: No you can't.
Speaker 2: I mean, I suppose when when people look at it
Speaker 2: and say, well, it's not like a real loan, it's
Speaker 2: you know, it's a lump sum that you might never
Speaker 2: pay off, and so in the end that maybe a
Speaker 2: very large number of people will never pay back where
Speaker 2: they borrow.
Speaker 1: So watch the problem.
Speaker 2: I think that that's a confusion, isn't it, between effectively
Speaker 2: stock and flow.
Speaker 1: Right, You're still.
Speaker 2: Paying nine percentage points extra every year, and that's a
Speaker 2: massive burden, regardless of what the big number is, whether
Speaker 2: you're paid off or not.
Speaker 3: But also, I mean the other thing is the reason
Speaker 3: they keep changing it. I think this is that says
Speaker 3: actually important is that the government is then increasing the
Speaker 3: number of people who do endor promently pay it bus
Speaker 3: And I think that's it, because you're really people started
Speaker 3: obviously oh well it's not a real loaning and it
Speaker 3: doesn't matter that much anyway. But the closer it gets
Speaker 3: to being something that will likely not this is just
Speaker 3: a summer money that you have to pay off over
Speaker 3: your work in lifetime. You know, you can no longer
Speaker 3: kind of keep dismissing it like that. I mean a
Speaker 3: law Plan two is when people are complaining about Plan five,
Speaker 3: actually moves it much further along that way, the interest
Speaker 3: rate doesn't look as ugly, but the fact you have
Speaker 3: to pay over forty years thirty means that far more
Speaker 3: people are going to end up paying the whole thing.
Speaker 2: Yeah, and I think people are beginning to notice some
Speaker 2: of the unfairnesses here. And one of the things that
Speaker 2: you hear people now talking about over and over again
Speaker 2: with the Plan two loans and the Plan vied by
Speaker 2: the way, is that the interest rate is based on RPI,
Speaker 2: not CPI. Now the government uses CPI for almost everything
Speaker 2: because they no longer consider RPI to be a reasonable
Speaker 2: measure of inflation. But of course when it comes to
Speaker 2: money that the government has keen to receive, it's much
Speaker 2: better for them to use RPI because it generally comes
Speaker 2: in about one percentage point higher than CPI. So if
Speaker 2: you say we're all student loans are based the interest
Speaker 2: rate is based on RPI, that brings in a lot
Speaker 2: more money, but also it's kind of unfair because it's
Speaker 2: not used for any anything else. And then if you
Speaker 2: look at Plan five EI, the one that most recent
Speaker 2: students are on, the interest rate is just RPI.
Speaker 1: That's it. You pay back over.
Speaker 2: Forty years, right, but Plan two it's your RPI. And
Speaker 2: then in a sort of bount of extraordinary progressiveness, because
Speaker 2: the UK tax system is one of the most progressive
Speaker 2: in the world. I don't think people grasp that very often,
Speaker 2: but this is yet another example of why this is
Speaker 2: a tax, not alone and not just a tax, but.
Speaker 1: A very very progressive tax.
Speaker 2: The interest rate you pay goes up as you earn,
Speaker 2: more so at the bottom.
Speaker 1: Of the threshold.
Speaker 2: When you go over that threshold and forum type two loans,
Speaker 2: it's just over twenty eight thousand, isn't it twenty eight
Speaker 2: than four hundred ish pout At that.
Speaker 1: Level you just pay RPI.
Speaker 2: By the time you get up to the top, you're
Speaker 2: playing RPI plus three percentage points.
Speaker 1: So these interest rates are.
Speaker 2: Very high and that doesn't seem quite right.
Speaker 3: Yeah, And to be clear, the top is just fifty
Speaker 3: one tho, so it's the bottom of the forty percent
Speaker 3: tax bracket.
Speaker 2: And the other on fairness that I think people have
Speaker 2: now noticed is this business of the threshold being frozen.
Speaker 2: So the moment we just said it's over twenty eight thousand,
Speaker 2: the current threshold. It's going to be moved up to
Speaker 2: twenty nine thousand, three hundred and eighty five pounds from
Speaker 2: April twenty twenty seven, but then frozen for three years.
Speaker 2: And this brings us into fiscal drag, which people perfectly
Speaker 2: reading me say, is not something that should be used
Speaker 2: in this context to let them inflation deal with the problem.
Speaker 2: So if you've been listening to government ministers talking about
Speaker 2: this recently and Rachel Ruths herself talking about it, one
Speaker 2: of the things they say is, oh, well, you know
Speaker 2: we're keeping an eye on this. I know we're watching it.
Speaker 2: No idea, you know, poor people, et cetera. But but
Speaker 2: we've got a lot of stuff to pay for. And
Speaker 2: suddenly you look at this and you're like, yeah, that's
Speaker 2: a tax. That is a tax. They're shifting the goalposts
Speaker 2: all the time in order to increase the revenues from it,
Speaker 2: as if it were a tax to you know, have
Speaker 2: it help pay for other things, et cetera. So that's
Speaker 2: obviously absolutely maddening for people with this dat.
Speaker 3: Yeah, and it's also worry because as soon as it
Speaker 3: gets recognized in that way, then the direction just keeps
Speaker 3: moving towards it. Being attacks. It's one thing, you know,
Speaker 3: we'd be sitting and we talk about how should you
Speaker 3: pay for this? How should you think about paying for this?
Speaker 3: And in an ideal world, yeah, you would have you know,
Speaker 3: like the resources that appearents would have the resources to
Speaker 3: actually just pay for it up front and it wouldn't
Speaker 3: be something you had to worry about. But I think
Speaker 3: we now have to think about getting a degree as
Speaker 3: is it actually value for money in a way that
Speaker 3: you didn't have to whenever we went to UNI because
Speaker 3: it didn't ultimately cost as much or anything at all
Speaker 3: dependent Whereas now we young people don't have that luxury anymore.
Speaker 3: You know. It basically is this thing worth paying sixty
Speaker 3: grand for? You know? And that's that then moves away
Speaker 3: from the university experience of you know, getting away from
Speaker 3: your hometown and meeting new people and our rest. Well,
Speaker 3: you can do that in other ways aren't going to
Speaker 3: cost you that kind of money. So that thing is
Speaker 3: something that's to be seriously kind of thought about, as
Speaker 3: opposed to all these people you see trotted out on
Speaker 3: newsnight and all the rest of it, who went to
Speaker 3: UNI in nineteen seventy five or whatever, when somebody paid
Speaker 3: them to do it, and they can waft on about
Speaker 3: how oh yeah, it's all about you know, can I
Speaker 3: the enlightenment and learning and education for the sake of it?
Speaker 3: You can't. That's no longer a luxury that we've got.
Speaker 2: No, And it's interesting that when you were talking about
Speaker 2: it just now, you said, is it worth sixty four grand,
Speaker 2: sixty five grand, seventy grand? And I would say the
Speaker 2: other way around, I'd say, is it worth nine percentage
Speaker 2: points of extra tax for your entire working life?
Speaker 3: Yeah? I mean that too. I mean I think the
Speaker 3: only benefit to say in sixty grand is because it
Speaker 3: actually puts a figure on it up front, becaus I
Speaker 3: think a lot of people, until you're actually paying that
Speaker 3: nine percent, you're not aware of just how brutal that
Speaker 3: is in terms of extra tax.
Speaker 1: So, okay, onto the real questions. Now.
Speaker 2: We've done a podcast before you and I on whether,
Speaker 2: if you can afford it, you should pay for your
Speaker 2: kid's education upfront, and I think you know, we came
Speaker 2: down on the side of, well, all right, it depends
Speaker 2: if you have plenty of money and you want to
Speaker 2: re leave your child of that psychological burden. Absolutely, if
Speaker 2: you have a limited amount of money, are you better
Speaker 2: off putting it into a house deposit for them later,
Speaker 2: or putting it into a pension for them or into
Speaker 2: an ISA for them, etc.
Speaker 1: So choices, choices, choices.
Speaker 2: And we can't really have a clear view for any individual,
Speaker 2: can we?
Speaker 3: Unfortunately not? I mean again, I think this is kind
Speaker 3: of the problem with it being being more lake attacks
Speaker 3: than a day, because it's always going to be fating
Speaker 3: as a priority with all the other things that you
Speaker 3: need to pay for, and so many of those things
Speaker 3: are higher priority of like buying the host. You know,
Speaker 3: if you could got a choice doing pay an extra
Speaker 3: to your student there or saving not for the hosing deposit,
Speaker 3: that really isn't any coin test there, because what where's
Speaker 3: the money for the house? Can they come from? If
Speaker 3: you've whacked any of the student loan? Obviously emergency find
Speaker 3: needs to be a built up before even considered any
Speaker 3: of this.
Speaker 2: And then pension, well, hundred percent mortgage you one hundredercent
Speaker 2: mortgage and you've got a higher cash flow, makes it
Speaker 2: easier to get a mortgage.
Speaker 3: I mean that's true. You could, yeah, if you want to,
Speaker 3: you could assume that you can get wine, but then you
Speaker 3: play get two expensive forms of a day coming out
Speaker 3: of something your finances if your mind.
Speaker 1: Yeah, okay, So how do we solve this problem?
Speaker 2: Now? Coming back has been out saying let's get this
Speaker 2: interest right down, cut it down, and.
Speaker 1: That will help.
Speaker 2: But of course it only helps to a certain degree,
Speaker 2: because even if you're playing a significantly lower rate of interest,
Speaker 2: you might still end up paying the ninet percentage points
Speaker 2: for the rest of your career. So the other side
Speaker 2: of this Martin Lewis argument is that the threshold should
Speaker 2: be higher, significantly higher, and that would make the difference.
Speaker 2: My own view is that they're both wrong, because that's
Speaker 2: a good way to go with this kind of thing.
Speaker 1: And then in fact, the best thing to do would
Speaker 1: be to you know, maybe.
Speaker 2: I don't really know about the threshold. Thousand pounds, ye,
Speaker 2: thousan pounds. There is not going to make much difference
Speaker 2: people over a career, but it would make sense for
Speaker 2: there to be really no interest rate on it at all.
Speaker 2: Just pay it back in nominal terms and be done
Speaker 2: with it.
Speaker 1: Then we're subsidizing.
Speaker 2: Education to a degree, to a degree, but they're still repayment.
Speaker 1: That would work.
Speaker 2: And the other possibility and you know, I would really
Speaker 2: go great guns with this one. This would be my
Speaker 2: absolute topic. Absolute topic would be to work a little
Speaker 2: harder to create an economy that creates an awful lot
Speaker 2: of high income jobs so that paying this debt off
Speaker 2: isn't such an extraordinary burden. A world where people don't
Speaker 2: aspire to earning forty two thousand pounds but are pretty
Speaker 2: sure that if they'd really do well, they'll be earning
Speaker 2: one hundred and seventy that's the actual answer, right.
Speaker 3: Yeah. There's a journalist of and the Ft joined Burden
Speaker 3: mud Duck who did a really good piece on Yes,
Speaker 3: and they basically pointed out that the UK is the
Speaker 3: only place where the graduate premium has gone down, even
Speaker 3: the low student participation has gone up in loads of
Speaker 3: different countries. So it's not just as I know. To
Speaker 3: be fair, I fell into this a bit. I thought,
Speaker 3: it's because we get so many graduates now that the
Speaker 3: graduate premium has gone down, but just as an echo
Speaker 3: that helps, we are including places like you know, the
Speaker 3: US and Australia. And his point is basically it's just
Speaker 3: because they've produced the decent, high paying jobs that had
Speaker 3: enough graduate jobs to go around.
Speaker 2: Growth low growth and live productivity. And that's why people
Speaker 2: care about these loans so much. That's why they're such
Speaker 2: a purdon is because we can't create the high income
Speaker 2: jobs to pay them off easily, to make them in nothing.
Speaker 2: Maybe will be able to brush them off and say, well,
Speaker 2: that'll be gone by the time I'm thirty four.
Speaker 1: I'm all good.
Speaker 3: It's so so interesting because employers are always complaining about
Speaker 3: how we don't have a skilled enough workforce, and that's
Speaker 3: why we need to import lots of people. But as
Speaker 3: tons of we see me have an ordnly qualified workforce,
Speaker 3: but who employers can pervade the jobs. So that's a
Speaker 3: sort of interesting Say they're shoe, they are. But perhaps
Speaker 3: when we can tackle another do yeah.
Speaker 2: Anyway, So I suppose what we come down to here
Speaker 2: is will there be reformed? Very probably? I would expect
Speaker 2: somebody to do something quite soon. There are well over
Speaker 2: five million people on that type two of student loan,
Speaker 2: and so that's that's quite a big voting block right there.
Speaker 2: So someone will want to do something for them. But
Speaker 2: I strongly suspect that whether we talk about putting the
Speaker 2: threshold up by a couple of grand or reducing the
Speaker 2: interest rate a little bit, or making the interest rate
Speaker 2: maybe even less progressive, so everyone pays the same rate
Speaker 2: regardless of income whatever something like that. But in the main,
Speaker 2: that's not going to make the difference. What's really going
Speaker 2: to make the difference is not having less to pay back,
Speaker 2: but earning more. So it doesn't feel such a burden.
Speaker 2: And I don't see and maybe you have a different view,
Speaker 2: but I don't see that coming down the tracks anytime soon.
Speaker 3: Well, yeah, it's just added too Bretons can a long
Speaker 3: list of huntly unsolvable problems that could always sort of
Speaker 3: if we just did slightly cheaper energy.
Speaker 2: That would be that would go quite a long way, John,
Speaker 2: quite a long way, right.
Speaker 1: We don't want to get into a different conversation.
Speaker 2: And I am sorry, students, I don't feel that we
Speaker 2: have offered you a lot of hope here.
Speaker 3: If you are about to go to unique look things
Speaker 3: like apprenticeships as well or instead you would like just
Speaker 3: just think about your options. I'm not saying don't go,
Speaker 3: but you may be have to think about it with
Speaker 3: a slightly harder head than a lot of people around
Speaker 3: you are encouraging you do.
Speaker 1: Thanks for listening to this week's Marren Talks Your Money.
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