2 May 2023

Keir Starmer’s tuition fees U-turn ignores the real problem with the system

There’s no justification for a lifelong stealth tax on those graduates who weren’t old or wealthy enough to escape it.

Here are two political facts for you to consider.

Fact one: if you were the government and had found a spare £9bn down the back of the Treasury sofa, you probably wouldn’t spend it on abolishing tuition fees. If you care about social mobility, fairness and investing in the education of future generations, universities are not a good place to start.

You could make much more of an impact by, for example, channelling that money into schools, particularly early-years education where interventions make the biggest difference. You could fund extra support for vulnerable pupils and those from low-income families, ensure no child comes to school too hungry to learn, offer after-school and holiday clubs to help them stay on track, and invest in technology for those who don’t have a computer or internet connection at home. You could also use some of the money to increase teachers‘ pay, which would help with recruitment and retention and address the fact that nearly half of state schools are using non-specialist maths teachers. Or you could simply pump some of it into the £15bn catch-up plan to tackle learning lost during the pandemic devised by Kevan Collins, Boris Johnson’s education recovery commissioner, who promptly quit when the Treasury (at the time headed by none other than Rishi Sunak) offered less than a tenth of that.

Weighed up against all that, diverting the cash towards the 50 per cent of school leavers who want to spend three years getting a degree that will (hopefully) increase their future earning potential doesn’t seem all that cost-effective. Or, indeed, fair.

That’s fact one, and it explains why Keir Starmer has just confirmed he’s dropping Labour’s pledge to abolish tuition fees in England – which would have cost that £9bn a year – despite it being in the party’s 2019 manifesto and the outrage and cries of betrayal it will prompt.

Fact two, though, is even more important. The current tuition fee and student loan system, which mandates fees of £9,250 a year for domestic students in England and Wales, then piles on the interest and deducts “repayments” for the rest of most graduates’ working lives, is horrendously unjust. It’s socially regressive, stacks the tax burden against young people and doesn’t fund universities properly anyway. And yet the Conservatives, who have been in power for 13 years and oversaw the tripling of tuition fees from 2012 onwards as part of the coalition government, don’t seem remotely interested in talking about it.

Before anyone accuses me of having an axe to grind, I’m old enough that the insanity of the current system doesn’t affect me. My own fees were capped at £3,225, with a low enough interest rate that repaying the loan in full was actually manageable. Post-2012 graduates, however, don’t just have three times as much debt (plus maintenance loans), they have been saddled with an interest rate that makes those loans almost impossible to ever pay off: Retail Price Index inflation plus 3 per cent. That meant that for a decade, while wages stagnated and the Bank of England base rate was barely above zero, students’ interest rose exponentially. They accrued around £6,000 in interest merely during the time they were at university. Even if they get jobs immediately and make monthly payments for decades, it is estimated that over 80 per cent of post-2012 graduates will never pay back their loans in full.

That, plus the fact repayments are based on earnings, makes this a lot less of a loan in the conventional sense. It is essentially a tax – a tax that the government decided a year ago should be paid for 40 years after graduation, as opposed to being forgiven after 30, meaning graduates will be charged almost until their retirement.

That is, of course, unless they had the family wealth to pay for their courses upfront, without taking out the loans. Those graduates pay no extra tax at all. Nor, of course, do the ones who graduated before tuition fees were first introduced in 1998, or before 2012 when fees were much lower. In other words, the vast majority of MPs.

Much ink has been spilled over the fact the UK’s tax burden is now the highest in post-war history, but we don’t talk enough about our two-tiered tax system. Student loan repayments for post-2012 graduates, of 9 per cent, kick in when someone is earning £27,295 or above (the UK median wage in 2022 was £33,280). Add that to the basic rate of income tax (20 per cent) and national insurance (12 per cent), and that’s a marginal tax rate of 41 per cent. The marginal rate above £50,270, for those lucky enough to be earning that much, is 51 per cent. This is, of course, before you take things like post-graduate loans into account, which distort the picture even more for anyone irresponsible enough to have done a master’s or doctorate.

For context, the highest marginal tax rate, for those earning over £125,140 a year who didn’t take out a student loan post-2012, is 47 per cent. Capitals gains tax, meanwhile, which is paid on unearned income is 20 per cent.

You can argue that people should pay for their own higher education, and you might have a point. But it’s still impossible to justify having an underclass of additional taxpayers forced to endure having half their income eaten up before they even see it, while those old enough or wealthy enough not to have got caught in the trap pay less on much higher incomes. Should the junior account executive really be paying a higher tax rate than the CEO? Should nurses and teachers be saddled by decades of debt that the politicians insisting there’s no extra money to pay them are free from? What’s that going to do to our economy, our public services, or our sense of intergenerational trust?

Fixing this mess will require admitting some hard truths. Maybe it doesn’t make sense to encourage half of all teenagers to sign up for a lifetime of debt to enrol on degrees, especially when the value of some of the courses is highly debatable. Throwing money indiscriminately at those who go to universities, as Labour’s pledge to abolish fees outright would have done if Starmer hadn’t scrapped it, is just an exorbitantly expensive sticking plaster. But the present situation is unjustifiable. Perhaps we should recognise the system for what it is – a stealth graduate tax – and impose it more fairly on everyone who benefits from the UK’s world-leading university sector. Or put the interest rate back to something manageable and offer proper support to those who don’t have parental wealth to fall back on.

Starmer probably made the right call ditching the policy. There are better ways to spend the money on education. But young people have a right to be outraged. Their parents’ generation decided they should be expected to pay a higher tax rate, effectively forever, if they wanted a degree they were told was crucial for their future success, and now that same generation seems baffled that they won’t just accept this sorry state of affairs. Wouldn’t you be furious?