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The UK needs a new deal for its highly taxed graduates

What makes an ideal graduate? One answer, which has become more attractive to me as I have grown older, is that the ideal graduate is someone who treats the senior people in their organisation with unquestioned deference.

But a more useful answer is: the ideal graduate would earn enough to have limited housing costs and a decent pension by the time they retire, and have enough children — two and a bit — to keep the population level steady. They might start a successful business or invent a new technology along the way. And to help them on that path, they will have a good qualification.

This is essentially the vision that both Rishi Sunak and Sir Keir Starmer have for young Britons. From 2025, however, the “ideal graduate” in the UK might need not have attended a university: when the lifelong loan entitlement comes into being, school-leavers will be able to borrow £37,000 over the course of their lives to pay for education or training, whether from technical colleges or universities, on the same terms that British undergraduates borrow money from the government to pay for their degrees.

When an electrician or a historian might both learn to code at the same institution, and repay their loans via the same mechanism in policy terms, the distinction between a university graduate and a graduate from a further education institution becomes essentially a question of snobbery.

What unites them becomes much more important: that both will, in practice, be paying a higher rate of income tax throughout their working lives than someone who has not acquired a history degree, an electrician’s certificate or the ability to code.

All the old debates about whether too many people go to university, or if it would be better to have more technical education, will become redundant. The government will be providing the same routes, on the same loan terms, to both. Many jobs are going to be supported via something that looks an awful lot like the UK’s higher education funding system. So it’s worth stopping and thinking about the strengths and weaknesses of the UK’s tuition fees model.

The genius of this model and the lifelong loan entitlement is twofold. The first point is that by nominally tying the funding for universities and further education institutions to their individual students, the government helps those organisations avoid battling schools for funds. This is a contest they will often lose, because issues relating to schools impact many more voters than do questions of further and higher education funding.

The second is that, in practice, tuition fees in England and Wales have proved to be a way to sneakily increase income tax. The Truss government’s passion for tax cuts drove the British economy and the government’s poll rating off a cliff, and Tory enthusiasm for tax cuts continues to place limitations on what Sunak can achieve in office.

On the Labour side, anxiety about being seen as the party of high taxes imposes constraints on Starmer of a different kind. But there is no serious caucus within the parliamentary Conservative party that opposes the very high marginal rates — an eight percentage point increase for many graduates — that make up the UK fees model. And although very few graduates are enthusiastic about the fees model, it doesn’t attract the same bitter rancour as income tax rises.

Nor has the introduction of tuition fees discouraged people from entering higher education. Many more people are now attending university than in the age of free tuition.

These are all reasons why Starmer feels he can abandon his commitment to abolish tuition fees, and why Labour will keep the lifelong loan entitlement in place if they take office after the next election.

But when we think about what we want from the ideal graduate, we should be clear that a higher marginal tax rate does have implications for their ability to achieve those things we envisioned for them. Although some very well-paid graduates will pay back their loan entitlements, most will be making payments for the majority of their working lives.

That places sharp limitations on the ability of the average graduate to save for their retirement — at the moment, almost half the average pensioner’s income comes from private sources — to buy a home, or to have a large enough financial cushion to set up their own businesses. The loan model has many positive features in terms of higher and further education funding. But it is a policy with real costs both for individual graduates and for society as a whole. If Conservative and Labour politicians alike want to not only keep but expand the fees model, they will need to do more to help UK graduates elsewhere.

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