Why a Graduate Tax Should Replace the Current Student Loan System
Two decades of student loan data show the repayment system functions as a poorly designed tax, according to a debate paper published on Thursday by the Higher Education Policy Institute.
Bahram Bekhradnia, founder and President of HEPI, argued in the new paper that the case for replacing student loans with a graduate tax should be reconsidered. Much of the prior debate focused narrowly on interest rates, write-off terms, and repayment thresholds rather than fundamental structural reform.
Under current arrangements, the loan scheme operates like a tax because repayments are collected through the PAYE system. These collections depend entirely on earnings rather than the initial amount borrowed, and liabilities can stretch across decades.
“For more than half a century a graduate tax has been dismissed, mainly because it would take decades to raise any money,” said Bahram Bekhradnia, HEPI’s founder and President and author of the report. “After 20 years of student loans that is no longer true.”
Critics previously rejected graduate taxes because a new framework would yield zero revenue for years while universities required immediate funding. Bekhradnia said that this objection has disappeared now that more than 20 cohorts of students have passed through the existing loan system.
Administrative mechanisms for identifying graduates, tracking earnings, and collecting liabilities already exist through PAYE. A 2019 reclassification by the Office for National Statistics altered the accounting advantage of loans by counting the portion expected to be unpaid as public spending immediately.
Only 56% of the 2024/25 entry cohort are projected to repay their loans in full. Meanwhile, graduates repaid approximately £5 billion during the 2024/25 financial year.
“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,” Bekhradnia told HEPI.
High interest rates added to balances annually mean graduates on modest earnings can end up paying more than higher earners who clear their debts quickly. A graduate tax would ensure that individuals who benefit most contribute the highest amounts, according to the findings.
Rose Stephenson, Director of Policy and Strategy at HEPI, explained the institute’s neutral stance on the matter. “There is widespread concern about how higher education is funded in England, yet there is no consensus on how to fix it,” Stephenson told HEPI. “HEPI does not take a position on which funding model is best; our role is to provide ideas and evidence to spark debate.”
Illustrative calculations indicate that a graduate tax drawing on a wider revenue base could raise equivalent funds at 4% to 6% of earnings, compared to the current 9% rate.