It’s time to be honest about our ‘graduate tax’

Within the next few weeks, the latest batch of freshly minted graduates will roll off the university production line. Laden with borrowings, they face decades of repayments to the Government-controlled Student Loan Company.

The recent capping of student loan interest rates at 6 per cent in the RPI+3 framework is presented as a meaningful intervention protecting graduates from spiralling debt.

It isn’t. At best, it’s a sticking plaster applied to a broken system. The fundamental structure no longer resembles a loan in any normal sense. At worst, it perpetuates a fiction obscuring how the system really works – and who ultimately pays.

The uncomfortable truth is this: the UK student finance system already functions as a form of graduate tax. The question isn’t whether that is acceptable, but why we continue to pretend otherwise.

In a traditional loan system, borrowers take on a defined amount of debt, repay it in full (with interest), and can expect to clear the balance within a predictable timeframe.

Not a loan, but a tax

That is not what happens with student loans in England. Repayments are income contingent. Graduates only repay when earning above a threshold, and payments are calculated as a proportion of income, not as a fixed instalment tied to the size of the original debt.

After a set period – typically 30 or 40 years – any remaining balance is written off. In practice, this means that the vast majority of graduate borrowers to date never repay the Student Loan Company in full. The IFS estimates it’s around 83 per cent of those on SLC Plan 2.

The headline debt figure is largely irrelevant to what they will actually pay in their lifetime. What really matters is their earnings trajectory.

This is the defining characteristic of a tax, not a loan: contributions are determined by income, not by the amount borrowed.

It’s an illusion, yet the system continues to be framed as personal debt. Graduates are told they “owe” tens of thousands of pounds, often leaving university with balances exceeding £50,000.

This framing is not benign.

For prospective students, particularly non-standard applicants such as more mature students seeking to enhance career pathways, or simply those from lower-income backgrounds, the psychological impact of large notional debt can be a deterrent to participation.

For graduates, it creates confusion about repayment obligations and fuels anxiety about financial futures that don’t reflect the reality of how the system operates.

Cap on interest rates

The recent interest rate cap, against a background of possible inflationary pressure,  does little to address this. While politically attractive, it focuses on the size of the debt rather than the structure of repayments, reinforcing the very misconception that the policy should try to dispel.

The system already behaves like a tax – just look at the mechanics. Repayments are collected through payroll systems, alongside income tax and National Insurance. They rise and fall with earnings. They cease entirely below a certain income threshold. And crucially, they are time-limited rather than balance-limited: after a fixed period, any remaining liability disappears.

This is not how commercial debt works. It is, however, very similar to how a hypothecated tax might be designed.

Worse still, the distributional effects mirror those of a poorly calibrated tax system. Lower- and middle-earning graduates often repay for the full duration of the loan term, effectively paying a higher proportion of their income over time.

Higher earners, by contrast, are more likely to repay their balance in full, sooner, limiting the total amount they contribute relative to their lifetime earnings. In other words, the system risks being regressive in practice, even if it is progressive in intent.

The long-term perspective

A growing body of analysis suggests the student loan system may generate a long-term surplus for the Treasury under current terms, particularly as repayment thresholds are frozen and repayment periods extended.

Whether or not one accepts that conclusion, the direction of travel is clear: this is no longer simply a mechanism for cost-sharing between graduates and the state. It is a significant, long-term revenue stream.

If that is the case, then transparency matters. Calling the system a “loan” implies a level of individual liability and eventual clearance that does not reflect reality for most borrowers. It also obscures the system functioning as a quasi-tax on graduate earnings.

Honesty matters here. Most won’t argue against graduates contributing to the cost of their education. There’s a strong case for a system in which those who benefit financially from higher education make a proportionate contribution over time. But if that’s the policy objective, say it clearly and design it accordingly.

Let’s be honest

Perpetuating this pretence of a loan creates confusion, distorts behaviour, and undermines trust. It also makes real reform harder, because debate becomes fixated on interest rates and headline debt figures rather than on structured contributions.

Honest framing opens the door to better policy design. It allows policymakers to focus on progressivity, fairness, and simplicity. It also enables clearer communication to students, who deserve to understand the financial commitments they are taking on.

It’s time to call this what it already is: a graduate contribution system. Persisting with the language of loans, with cosmetic fixes such as interest rate caps, is anti-fairness, anti-participation, and not sustainable long term. Until we’re honest about student loans, we’ll continue to debate the symptoms of a broken system while avoiding the reality at its core.

About the author: Appi Faruki is CEO of PEN Group, a partner for universities and higher education institutions.