Education University

UK student loans: just a graduate tax?

Originally posted on November 13, 2020 @ 11:08 am

In the UK, as in the US, higher education access is supported through government loans. In the UK, this system has been in place since 1998/99 when student fees of £1000 were introduced for undergraduate courses. By the time I went to university in 2002, this had risen to around £3000 and, at the time of writing fees for undergraduate courses in the UK stand at £9,250 per year of the course.

Much has been made over the introduction of tuition fees and the main vehicle used to pay for them – student loans. In this post I want to explore reasons behind the introduction of fees and loans in the UK and what some of the implications of these may be.

Colleagues I have discussed this with often maintain that loans are just a graduate tax, that graduates only begin to pay them off when earning above a certain level, and that if they are not paid off in 30 years they are erased. This may be true, but, I have felt uneasy, in my role as a university guidance counselor about just dismissing the implications for young people who decide, on our advice, to get themselves up to almost £30,000 in debt on fees alone, ignoring all other costs of being a student. This post is really an opportunity for me to explore this topic in a little more detail.

Why loans?

A little known theory in economics, known as Human Capital Theory (HCT), asserts that investments made in the development of skills and knowledge, through training and education, will improve the productivity of an individual and thus the economy as a whole. On the personal level, the rationale, from this view, for investing in education is for the real term pay off you will get from getting a better paid job. On a macro scale, the amount that a government invests in education then, so the thinking goes, the greater productivity of the economy and subsequent increase in GDP.

But there is a trade off for a government. Investment in Higher Education (HE) is expensive, and has a lower rate of return according to many studies. And so governments are less willing to invest tax payers money, especially for degrees that may have a low return on investment.

Enter, Milton Friedman and the free market, which suggests that the market for HE may be improved, and institutions made more competitive, if the state reduces its input, oversight and regulation. Friedman advocates for fees for HE be covered by the student in the form of loans from the government

So, naturally, based on two economic rationales, free markets and HCT, the case for HE investment through student loans is made. What is the problem?


One of my concerns around this issue which is linked to others is the impact it has on choice. When we begin to look at degrees in terms of return on investment, then some degrees seem to have a higher value – graduates from these degrees get paid more and therefore can pay off their debts more easily. There are two problems with this.

Imagine that degrees in computer science command the highest salaries for post graduates. This is because in the labour market there is a shortage of these skills. As more and more people switch to studying this degree because it pays better, the labour market becomes flooded with these skills and the price of labour goes down. Thus the return on the investment goes down as wages are driven down by competition. This isn’t the graduates fault who may now be saddled with debt that is harder to pay off.

Secondly, should the value of a degree be measured purely in these monetary terms? As I have got older I have appreciated more and more what can be learned in non science undergraduate courses (I did three science A Levels and a science first degree) like Arts which tend to command lower salaries. There are a whole variety of reasons why these degrees have more intrinsic and instrumental value than just monetary value for a graduate but they stand to die out and receive less funding if individuals stop applying for them, which they will do if they are thinking about returns on investment alone.

Related to this point and the point below about equity is the idea that those that do have to worry about debt, those students coming from less affluent backgrounds will feel more pressure to not take a degree that doesn’t have a good return of investment, so we have a class or wealth divide around who really has choice of degree path, with the more affluent students, having more rational choice. So the first charge to lay at the door of the idea of loans is that they actually reduce choice for poorer students.

Equity and Access

Costs of entry to HE can present very significant barriers to individuals. This is the problem of access. If a government wants to promote a genuine free market for the sake of the economy, then the assumptions that everyone can access that market has to be addressed. In other words the government needs to ensure that all those “deserving” of a place in the appropriate labour market are able to get access to the education and training they need to be able to compete in that labour market effectively. And here is the rub, the introduction of fees raises a barrier to individuals who despite a reduced socio-economic background may have the personal qualities to make the most of the labour market at the other side.

Fees and loans may not present much a problem to members of society who have the social and economic capital in order to cover the costs, but they will raise very real barriers to children, with just as much, if not more merit, for whom the prospect of becoming £30,000+ in debt is a very frightening prospect. So the second charge to lay at the door of fees and loans, is that they do nothing (at the very least) to provide equity in society. If we want a just, socially mobile society, where individuals are not constrained by the random act of birth, then we need to think hard about the implications of these loans.

There is another element to this. Many people understand the idea of genes and inheritance, and probably can understand the idea that certain biological traits are inherited from parents. But what often is missed is that children inherit their early environment too. Bourdieu writes about this in terms of cultural capital. Plomin also references this idea in his work. Children are born, at random, into a particular family environment, just in the same way they are born into a body made from a particular mix of genes. The family environment will transmit cultural capital in the form of knowledge, customs, understandings particular to that family. To use an extreme example, some children will grow up exposed to ballet, opera and fine art. Others will be exposed to cold, fend for yourself dinner, because mum and dad are both out having to work their third job.

Which group of children will be best placed to make the best decisions in terms of university courses? Which will be more likely to understand how to make the most out of university and capitalise on their experience?

This problem of equity and access leads to a third problem: social reproduction. Children who are born in the “right” place will be more able to go on to reproduce those conditions for their children, while the others will find it much harder to shift gears so to speak.


So let’s lay that aside. I have outlined above three misgivings about the system: Choice, Equity, Access. I don’t claim that the points briefly expressed above are enough on their own to call for a change in the system, but they should at least give serious pause for thought. They certainly did for me when I came across them.

A fourth problem with student fees and loans is debt. And there are two elements to this for me.

Firstly, there is a general issue linked to the ideas above which goes along these lines: Those students who are already disadvantaged are the ones who will be most disadvantaged, on average, by this system. As I alluded to earlier, some students will not be put off by fees. Their families might be able to pay them directly or at least pay off the loans quickly once the graduate leaves and gains employment. Or, some parents may be able to make interest free loans to their kids on the understanding that these are paid back. Fair enough.

But many kids won’t be in this fortunate position. This will be because they come from families that are not that fortunate (yes, unfortunate, not lazy). So these kids, the ones that actually need the levelling affects of education, are the ones that will end up picking up the bill of debt.

Accepting this means that you can’t argue that loan repayment is a graduate tax – not every graduate will need to pay it. It’s a poor-graduates tax. It hits those from the poorest backgrounds the hardest. The less money you have going into uni, the more money you will have to pay back, either because you have to borrow more, or because it will take you longer to pay back.

And this is doubly true if they haven’t had the advice growing up (Remember cultural capital?) about maximising their investment and decide to spend £30,000 on Beckham studies.

The second issue about debt for me is the specific issue of interest rates, that the UK government employs. I was staggered when I looked at the student loans available to me as a postgraduate student this year. The UK government was willing to lend me money at a whopping 5.2%.


The Bank of England has lowered interest rates to 0.1%, mortgages are at an all time low, and I can get a loan from Nationwide for £20,000 at 2.9%. Why is the UK government charging higher interests rates than a corporate entity like a bank? Has it been turned into a business?

The only reason that the student loans company has an interest rate this high is to make money. Plain and simple. These are not loans designed to enable access to university, to level the playing field to allow those most disadvantaged a leg up. Instead they are a way for poor graduates to become compound interest slaves to government and society.

I could just about accept it, if the rates were lower or in line with other interest rates for important investments paid off over a long time i.e. mortgages. But I just find a rate of 5.2% entirely cynical.

Milton Friedman as Obi Wan Kenobi meets the UK government as Darth Vader. The young Anakin (aka Margaret Thatcher’s government) has learned the dark side of Firedman’s ideas so well that they will apply it to conquer the universe.

Whats the problem with a rate this high? Well, at that rate, because of compound interest the loan will have doubled in 14 years. So, if a student graduates and is not earning enough to begin to pay off the debt, they are soon going to find the amount owing has grown to crushing amounts.

Jason Hikel in less is more, and writers like David Graeber have highlighted the problems with debt capitalism but it strikes me that these loans made to students are not too dissimilar to the loans made to global south countries that tie them into repayments over years that reduce the nation’s ability to fund its own education and other social systems. It is fundamentally exploitative. And disproportionately exploitative of the poor.

Add to this that free market economics will see that the cost of labour is pushed down, and we have an unholy alliance of high student debt with declining relative wages.

I can’t see that causing any problems for society down the line /s.


Think of all that debt accumulating, providing a steady income to the UK government from all of those graduates taking out loans and paying them off over the next thirty year. Supporters claim that the government has promised to forgive the debts if they remain unpaid after 30 years, but I think that is naive.

The government has made drastic changes to teachers pensions, military pensions, as well as to women born in the 1950s, all in the last 10 years, There is nothing in that behaviour that suggests to me that they will keep their word. I do not believe for a minute they will be willing to give up this income stream of debt repayments which is set to become a lucrative industry for the government, they will need it to support growth of the economy. Debt fuels growth.

What do you think?

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