How to spring the graduate debt trap and stimulate economic growth

This blog was kindly authored by Professor David Green CBE DL, Vice Chancellor and Chief Executive, University of Worcester.

Andy Burnham’s Government has a very long to-do list.

One vital area for reform is the crushing impact of graduate debt, arising from the disastrous ‘reform’ of tuition fees and student loans in 2012, which heaped most of the cost of earning a higher education on the graduate.

This system produced a situation where hundreds of thousands of working graduates in vital professions such as engineering, medicine, the allied health professions, information technology, teaching and more, who are earning enough to pay higher rate tax, find that they lose as much as 70 per cent of every additional pound in earnings to deductions. Most also find that despite repaying £3,000 plus a year, they are making little or no progress in reducing their outstanding student debt which averages over £50,000.

The Treasury Select Committee’s recent report Student Loans: Broken and Unfair was withering:

The government has described the student loans system as unfair and broken; universities and students have agreed. So do we.

The Treasury Select Committee’s report was accompanied by the publication of numerous stories of hard-working and successful graduates in their late 20s and early 30s whose lives are being significantly detrimentally affected by the large student loan repayments they are making.

A typical, highly telling example is Laura May Nardella, 31, who paid back £3,000 in 2025. The BBC reported:

Despite that, the Cambridge graduate, who now works in HR, said her overall debt had actually gone up rather than down.

That’s because, as a higher earner, her loan debt has accrued interest at a rate of 6.2%.

‘That is the most difficult thing when it comes to the Plan 2 loan – that it feels like you’re not chipping away,’ she said.

‘It’s quite psychologically difficult. And it’s not how it was sold to us at the time.’

Laura May and hundreds of thousands of hard-working, reasonably successful graduates who provide a crucial part of the UK’s productive, highly skilled, professional workforce are now suffering from very high effective marginal deduction rates from their pay.

In my evidence to the Treasury Select Committee, I drew attention to precisely this problem with detailed examples, including graduates in such fields as engineering, information technology, teaching, medicine and health care who face rates of deduction of up to 70%, make thousands of pounds in student loan repayments and yet find their debt still growing!

This disastrous situation has a highly negative impact on human behaviour, which turns into a considerable drag on economic growth. Treasury policy is to avoid such situations arising.

What is to be done?

This blog proposes a solution which will strengthen the public finances, help hundreds of thousands of graduates repay their loan in full and incentivise work.

The £300 billion UK student loan book functions as a large, partially impaired public asset. A significant proportion of loans will never be repaid in full.

The key group is neither the highest earners, who will repay anyway, nor the lowest earners, who are protected by income-contingent design. It is the broad middle: graduates earning roughly £45,000–£75,000. These individuals repay substantial amounts over many years, but will often fall short of full repayment, leaving balances that are ultimately written off.

This is the zone of fiscal inefficiency and deep unfairness. It is also the zone where better policy can make a truly significant difference for the good.

A reform agenda: broadening the repayment base

The proposals advanced in the Treasury evidence offer a new approach which aims to enable a much higher proportion of graduates to clear their outstanding student loan completely, relatively early in their working life.

This will mean that they no longer pay an additional 9 per cent on each extra pound of their earnings and that the negative psychological, behavioural and financial effect of a large deadweight debt can be put behind them.

The proposals, if introduced, will not increase public spending. Instead, they will strengthen the public finances by many billions each year.

This will be done by incentivising additional, voluntary channels for repayment, including:

• Introducing the opportunity for individuals to salary-sacrifice for additional voluntary student loan repayments. This would enable graduates to make additional voluntary repayments highly tax efficiently. Employers would also pay the National Insurance contribution they would normally save through salary sacrifice to HMRC for crediting to the student loan company – thus further accelerating graduate debt repayment.
• Introducing the opportunity for employers to include ‘student loan credits’ in their remuneration package. Credits would be paid through the tax system and then directly channelled by HMRC to the Student Loan Company. These credits would be exempt from income tax as well as employers’ and employees’ National Insurance and Pension contributions.
• Exempting third-party payments direct to the student loan company to repay student debt from inheritance tax. This will stimulate very significant intergenerational support for young graduates from parents, grandparents and family members.

These measures would significantly broaden the effective repayment base by unlocking existing but unused financial capacity. Potential abuse can be simply tackled by capping. The system could also be extended by allowing, for example, a higher earner in a couple to salary sacrifice to repay the debt of their lower-earning partner.

For the Treasury, the usual objections to salary sacrifice fall away as every pound not paid in tax or national insurance due to the sacrifice goes directly to the government via the Student Loan Company.

Why this matters

These proposals will increase the proportion of student loans that are fully repaid, particularly among the numerous middle earners earning £45k to £75k per year.

Where such reforms convert partial repayment into full repayment, the fiscal impact is substantial. It reduces long-term write-offs and strengthens the public balance sheet.

Crucially, these measures also bring forward repayments, helping a cash-strapped government now.

Fairness, work and responsibility

For the Burnham government, the political appeal of this approach is clear.

• It aligns with a strong fairness narrative. The current system is experienced by many graduates as arbitrary and punitive.
• It reinforces the value of work and progression. These reforms strengthen incentives for effort and advancement. Incentivising faster repayment restores a sense of agency and fairness.
• It avoids the pitfalls of more polarised approaches. It is neither a very costly write-off nor modest tinkering with a system that has clearly failed.

A strategic opportunity

The Burnham government can reshape the system, making it possible and worthwhile to repay this debt. This would reduce distortions in the labour market, improve productivity, and strengthen the nation’s fiscal position. Properly framed as both fair and fiscally responsible, it will be a politically compelling reform package.

Adopting these proposals means that the Burnham Government could say to graduates: ‘This government is helping you clear debt, keep more of your hard-earned salary, build savings, buy a home and improve your future.’

This will be a crucial part of securing good growth in every postcode.