England’s university tuition fees have long been politically contentious – and with good reason. The maximum charge of £9,250 a year makes them the second highest in the developed world after the US.
Much is also made of the average student debt of £40,000. It is on these grounds that Labour, including under Keir Starmer’s leadership, has pledged to scrap tuition fees if elected. Political opponents riposte that this is not debt in the traditional sense, since repayments are linked to earnings and have no effect on an individual’s credit rating. The system, they argue, in fact resembles a graduate tax.
But few ever consider the logical conclusion: that graduates are left paying a significantly higher tax rate than non-graduates. Under the current system (for loans taken out post-2012), any graduate earning more than £26,575 pays a marginal tax rate of 41 per cent (20 per cent income tax, 12 per cent National Insurance and 9 per cent student loan repayments). By contrast, a non-graduate earning up to £50,000 pays 32 per cent. A graduate who earns more than £50,000, meanwhile, pays a marginal rate of 51 per cent, while a non-graduate earning up to £100,000 pays 42 per cent.
In addition to the repayment rate, there’s also the interest graduates are charged on their loans: a minimum of 2.6 per cent and a maximum of 5.6 per cent depending on income. In an environment of record low interest rates, the value of these loans is growing faster than the average mortgage, making them increasingly difficult to pay off. When combined with high housing costs and inadequate wages, such rates significantly reduce graduate living standards – but this fact rarely enters political discussion.
Is the system defensible? Supporters of fees have traditionally pointed to the “graduate premium”: the pay advantage that those who attend university enjoy over those who do not. But over the last 20 years this has fallen from 19 per cent to 11 per cent. And though universities benefit individuals, their research also benefits the economy and society (as the Covid-19 vaccine roll-out has amply demonstrated).
If higher education is viewed as a public good, the argument for penalising graduates is further reduced. Those who enter paid employment will contribute through a progressive income tax system – one that could be made far more equitable (the Conservatives abolished the 50p rate on earnings over £150,000 and since 2010 have raised the 40p tax threshold from £37,400 to £50,000).
Even before the Covid-19 crisis led to a surge in unemployment, graduates in paid work were often dismissed as relatively comfortable. Rather than abolishing tuition fees at a cost of £6bn, some contend, Labour should spend the money on universal childcare or adult social care (these are not, of course, mutually exclusive options).
But viewing the issue through the prism of tax could reframe the debate. Labour – a party sometimes accused of never seeing a tax it does not want to raise – could boast of relieving the burden on what Ed Miliband called “the squeezed middle”. The Conservatives, meanwhile, a party that won the support of just 19 per cent of 18-24-year-olds at the 2019 general election, could finally adopt a youth-friendly policy. Whatever the outcome of the debate, the stealth taxation of graduates deserves to be recognised for what it is.
[See also: The great university con: how the British degree lost its value]
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