A graduate tax could fix Britain’s broken student loan system

In the early 1970s, only one in 10 school leavers went to university. I was one of them. By the late 1990s, the landscape had totally changed: the figure was nearly one in two.

Mine was the last generation to receive a grant to go to university, but as more and more students went into higher education, the situation became both unaffordable and unfair. Most taxpayers don’t go to university; why should they shoulder the full cost of the higher earnings graduates typically enjoy?

That is why I supported Labour’s introduction of £1,000 tuition fees in 1998, and their rise to £3,000 in 2006, along with a shift in public spending to early years education – which is crucial to all life opportunities.

What none of us imagined was the system becoming as broken as it is today. Graduates now are burdened with mountainous student debts averaging at least £70,000. Extortionate interest rates mean balances often grow faster than repayments. In 2024-25, more than 2.7 million graduates who made a repayment accumulated more interest than they paid off — up from 2.6 million the previous year. The Treasury, meanwhile, carries vast and rising liabilities.

Fees were trebled to £9,000 by the Conservative-Liberal Democrat coalition in 2012 and then frozen by the Tories at £9,250 until 2025. After years of high inflation, that freeze amounted to a real-terms cut, leaving universities with income worth closer to £6,500 per student. The consequences have been brutal: thousands of lecturers have been made redundant, diminishing teaching standards. No surprise then that nearly half of the UK’s universities have rising deficits, with closures and mergers forecast.

Higher fees for international students, who are meant to plug the gap, haven’t helped either. Numbers collapsed with tighter immigration and visa rules, and foreign nationals are now borrowing £4bn a year in student loans – ballooning by 40% since 2021-22.

The privatisation of university funding – shifting costs from taxpayers to individual students – has plainly failed. For every £3.50 taxpayers spend cancelling debt, just £1 goes on teaching.

Half of graduates can now expect to repay about £74,000 – much more than they borrowed in real terms because of the interest accrued, according to the Institute for Fiscal Studies. Women and those on low incomes are hit hardest; wealthier families simply pay upfront.

Today, about half of English students default on repaying any of their fees, and three-quarters don’t pay all of it back – a colossal failure in a system government ministers like me were persuaded would reduce pressures on public spending.

To anybody objecting to the value of university degrees, please note: China has more than 12 million new university graduates a year; India more than 10 million. The UK has about 1 million. In a competitive global economy, retreat is not an option.

It is reasonable that graduates contribute towards a privileged education that most of their fellow citizens don’t enjoy. But why not do so by replacing fees with a small addition to income tax paid by graduates throughout their working life?

This idea was suggested by chancellor Gordon Brown in 2003, though it never reached cabinet, instead becoming tangled up in the Blair-Brown rupture that so damaged Labour in office.

In 2018 the MillionPlus thinktank suggested a graduate tax rate rising across income bands, with nothing paid on earnings up to £10,000 a year; 2% up to £25,000; 2.75% up to £42,000; and 3.5% above that. Even at £50,000, the effective rate would be just over 2.1% – far lower than the 9% now compulsorily deducted from graduate workers above the repayment threshold.

This would be much fairer for lower- and middle-earning graduates: the more you earn, the more tax you pay. It would be good for universities too: their revenues would rise as incomes rise.

A graduate earning £30,000 a year would pay £36.50 a month. Under today’s student fees/loan scheme, if they earn £30,000 a year and have a total debt of £70,000, they will be paying £11.52 a month – a smaller figure in the short-term, certainly, but with the graduate tax they would have no debt to count against any asset borrowing such as mortgages.

Collecting this small graduate tax through HMRC would be simpler, more efficient and cheaper than the present wasteful bureaucracy. It would also offer a more sustainable stream of revenue for the Treasury and thus be more fiscally responsible. A win-win for students, their families and taxpayers.

The Treasury resists because a graduate tax would count as public borrowing, while fees do not. Another Treasury bête noire: the tax would be hypothecated.

Yet with public liabilities from unpaid fees and loans running at £270bn and forecast to reach £500bn by the 2040s, those objections are simply bonkers.

Another objection, doubtless anathema to Labour ministers, is that it would be a new tax. Yes, it would be called a new tax. But compared with the punitive chaos we have now, it would be fairer, more sustainable and more honest.

Lord Hain was a cabinet minister from 2002 to 2010

Photograph by Dan Kitwood/Getty Images