Time to Reconsider a Graduate Tax? Why 20 years of student loans change the case for reform
The case for replacing student loans with a graduate tax should be reopened, according to a new debate paper 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.
Notes to editors:
- HEPI was founded in 2002 to influence the higher education debate with evidence. We are UK-wide, independent and non-partisan. We are funded by organisations and higher education institutions that wish to support vibrant policy discussions, as well as through our own events. HEPI is a company limited by guarantee and a registered charity.
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