Everyone with a brain can see student loans are unfair. Except the chancellor

It is now one rule for cushy ‘triple-lock’ pensioners and another for stricken young people being milked for everything they have – and even elders like me can see it, says Sean O’Grady

Every so often a government comes along and makes a stupid but epoch-making change that becomes so culturally entrenched and embedded in the public finances that it’s virtually impossible to reform, let alone reverse, and does incalculable damage for generations.

One such was the introduction of student “loans” by the Blair administration, one of its few abiding mistakes. The idea was that expanding university provision would have to be paid for, but, because of the aversion to income tax displayed by the British voting public, some other method of financing would need to be found – disguised taxation.

Hence the “loans” – in reality a surcharge on the income tax paid by graduates. It was supposedly fair because if you boosted your chances of high earnings with a better education – which was being funded by lots of non-grads – you should pay the extra back, in hard cash.

It was always nonsense, and over the succeeding decades the steep increases in tuition fees and interest rates for “repayment” have turned the system into cruel, grotesque nonsense.

A “student loan” is becoming more like what the bond markets used to call a “perpetual” – a debt that can never be repaid, and which will extract usury for the entire life of its subject.

The man or woman so burdened has no agency in the matter – and no escape. It’s estimated there are now 5.8 million people who took out a student loan between 2012 and July 2023 on a “Plan 2” repayment scheme, in which interest is set at the level of inflation, using the retail price index (RPI), plus up to three percentage points, depending on earnings. So let’s say a whopping 7.2 per cent at the moment (RPI usually being higher than CPI because it includes housing costs, a painful irony). Imagine if some war or oil crisis pushed RPI up to 10 per cent. Unsustainable.

Martin Lewis, Britain’s auxiliary chancellor of the Exchequer, was right to give Rachel Reeves both barrels (BBC/Getty)

That, my friends, is a harshly designed surtax, but one that only happens to be levied on people with a degree, and not necessarily on mega-earnings. It is in no way a repayment on any kind of “loan” as the term is commonly understood. It is an illogical and increasingly onerous burden and, I have to admit, imposed on a generation of younger people by their elders, like me, who of course got their higher education free (or, if you like, paid for by tax paid on future earnings).

And, I also have to concede, such terms stand in stark contrast to the “triple lock” on the state pension, which is protected by a link to earnings, inflation or a rise of 2.5 per cent, whichever is the greater. I don’t really believe in “intergenerational fairness” as a concept, but that doesn’t mean we have to go around inventing arbitrary and divisive rules for different groups in society.

Martin Lewis, Britain’s auxiliary chancellor of the Exchequer, is therefore right when he says – as he did on BBC’s Newsnight – these loans are poorly explained and are not “a moral thing to do”. In fact, the whole system should be scrapped because it was a mistake in the first place. It was always the case that if you went to university and on to enjoy a well-paid career, you’d pay more in tax than someone who didn’t choose or didn’t have the opportunity to get a degree.

Provided there’s a well-designed progressive system of income tax, then some high-flying Cambridge-educated barrister on the big fees was always going to be presented with a large bill from the Revenue every year. Another graduate who went on to become a vicar, say, or fell to some misfortune and had lower lifetime earnings would not. That’s fair.

Yet Rachel Reeves was still trying to argue the old class-based case on LBC this week: “Around half of people go to university today, but half don’t. And it is not right that people who don’t go to university are having to bear all the cost for others to do so.” She also claims that if you don’t earn enough, then the “loan” is eventually “written off” – but that’s only because even HMRC can’t pursue you beyond the grave.

Here’s another way of looking at this – a reductio ad absurdum which proves Reeves wrong. If everyone went to university, then everyone would be paying the extra tax. We’d just have a country with an overall higher rate of income tax on everyone – which is where we are heading. There could be no question of one group of non-grads subsidising the lifestyles of students; indeed, it would be very obvious that higher education, just like school-age education, is something that strengthens the entire nation’s stock of human capital.

“Uni” is not actually a middle-class racket – provided state schoolchildren have proper access to the best courses. We don’t lend money and charge interest on people for using the NHS disproportionately because they’re ill, nor do we charge parents extra for having lots of children entitled to free schooling or special educational needs and disabilities support.

Universities are good for the economy – huge export earners, a worthwhile investment in our young people, an engine for prosperity in run-down towns. We can debate about “Mickey Mouse degrees” and the efficiency of these institutions, and how many foreign students we wish to welcome. Fine. But we should always be clear that those who graduate and earn more will pay more tax. They also contribute to society, just like anyone else, and just the same as they always did before the student loan fiasco started. They need not be penalised for that.