Arguments against graduate tax in England ‘no longer hold’

England should reconsider the benefits of replacing the current student loans system with a graduate tax of between 4 and 6 per cent on earnings, a new paper argues. 

Writing for the Higher Education Policy Institute, the thinktank’s president Bahram Bekhradnia argues that the current student loan system is dysfunctional and lacks transparency. 

Instead, he argues that the case for a graduate tax should be reopened, and that the arguments traditionally used to fight against such a model “no longer hold”. 

The paper says that the current system – whereby students take out large loans that are then repaid over a minimum of 30 to 40 years as a proportion of their salaries before being written off – “has evolved into something that increasingly resembles a graduate tax”, meaning “many of the traditional objections to a graduate tax have weakened”. 

Traditionally, critics of a graduate tax have argued that it would not raise money for years before graduates begin paying it back, while universities need immediate funding. 

But the paper argues that more than 20 cohorts of loan-funded graduates have passed through the system since tuition fees were introduced in 1998 “and millions are already making income-contingent repayments” every month. 

“The objection that once dominated the debate, that government would have to fund universities for years before receiving anything back, no longer describes the position with anything like its former force,” it says. 

It adds that a tax would remove the stigma currently associated with the high levels of graduate debt. Higher earners would also contribute more under a graduate tax, it says, which is not the case under the current system, where wealthier graduates are able to pay off their loans sooner without incurring high levels of interest, while some poorer graduates may pay back more than their initial debt because of the interest.

Introducing a tax that included those who might traditionally pay it off swiftly, and extending payments across a longer period, would also mean that the repayment terms could be lower, falling from 9 per cent of monthly earnings to between 4 per cent and 6 per cent.

It says: “There is therefore no compelling reason to limit payments to a stated period. The longer the payment periods, potentially extending across much of a graduate’s working life, the broader the potential tax base and the lower the annual payment rates.”

But the paper acknowledges the “unfairness” that current graduates might feel around changes to their repayment system, and the prospect of their repayment periods being replaced with a lifelong tax, noting that retrospective changes to repayment thresholds have caused “serious controversy”. However, the paper argues, “none of this is a reason to abandon the idea”.

It stresses that the proposals are purely for tuition fees, rather than university maintenance loans, and suggests that the current system for repaying these loans could remain “untouched”. But it concedes that “care would need to be given to the total quantum of money being removed from people’s pay packets through a combination of the new graduate tax and the existing maintenance loan repayments”. 

Bekhradnia said that the introduction and evolution of the student loan system means “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,” he said.

“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.”

 juliette.rowsell@timeshighereducation.com