The case for replacing student loans with a graduate tax should
be reopened, according to a new report from HEPI, authored by
Bahram Bekhradnia, HEPI's founder and President.
The present student finance system is widely regarded as
dysfunctional, yet there is little consensus on what a feasible
alternative looks like. With 20 years' worth of students through
the loans and repayment systems, the report argues this is the
right moment to reevaluate the system.
The report argues there has been little fundamental
re-examination of the merits and disadvantages of the current
system, or of its two principal alternatives: (a) relying
entirely on state funding, or (b) a graduate tax. Much of the
debate to date has skirted around the surface, focusing on
interest rates, write-off and repayment thresholds.
The report argues that the loan system has become increasingly
similar to a tax. Repayments are collected through PAYE, depend
on earnings rather than the amount owed, and may continue for
decades. With high interest rates added to balances every year,
graduates on modest earnings can end up repaying more than higher
earners, who can clear loans quickly, raising questions around
fairness.
Graduate taxes have been long-proposed and rejected, in parts
because a new tax would raise nothing for years while
universities need funding now. The report argues that this
objection has largely fallen away. More than 20 cohorts of
students have passed through the current loan and repayment
arrangements. Many are already repaying through PAYE, and the
administrative system for identifying graduates, their earnings
and therefore their liabilities are already in place. Another key
argument for loans has also gone. Since the Office for National
Statistics reclassified student loans in 2019, the part of each
loan not expected to be repaid counts as public spending when the
loan is made.
Key findings
- The student loan system now resembles a graduate tax in most
respects other than its name.
- Under present arrangements, graduates who earn less and so
have benefited least from higher education can repay more than
the highest earners. A graduate tax would ensure that those who
have benefited most pay most.
- A graduate tax would be more transparent: graduates would
know when payments begin, how they are calculated and when they
stop. It would end the growing debts faced by many graduates as
interest is added to their loans each year.
- With more than 20 cohorts of loan-funded graduates in the
workforce, the principal Treasury objection the cost of
transition has been substantially reduced, if not eliminated.
- The 2019 reclassification removed much of the accounting
advantage loans were once claimed to have. Although most people
will pay off the majority of their loans, only 56% of the 2024/25
entry cohort are projected to repay in full.
- Graduates repaid around £5 billion in 2024/25. Illustrative
calculations suggest that a graduate tax drawing on a wider base
could raise the same at around 4% to 6% of earnings, compared
with today's 9%.
Bahram Bekhradnia, HEPI's founder and President and
author of the report, said:
For more than half a century a graduate tax has been dismissed,
mainly because it would take decades to raise any money. After 20
years of student loans that is no longer true. Millions of
graduates already pay a share of their earnings through PAYE, and
the machinery to collect a graduate tax already exists.
The present system has become a graduate tax in all but name but
a badly designed one, in which many of those who have benefited
least pay the most, and many graduates see their debts grow year
after year. A graduate tax would be simpler and more transparent,
and those who benefit most would contribute most.
It is time to reconsider the argument in favour of a graduate tax
on its merits, on the basis of where things stand today rather
than where they stood 20 years ago.
Rose Stephenson, Director of Policy and Strategy at HEPI,
said:
There is widespread concern about how higher education is funded
in England, yet there is no consensus on how to fix it. HEPI does
not take a position on which funding model is best; our role is
to provide ideas and evidence to spark debate. Bahram
Bekhradnia's paper does exactly that. It argues the old
objections to a graduate tax have not stood the test of time, and
that an idea long dismissed deserves a second look."
