Call for ‘flawed’ student loan to be replaced with a new tax

STUDENT loans are so “flawed” they should be replaced with a graduate tax, ministers have been urged.

The current system for financing undergraduate degrees operates under a “fiscal illusion” and costs the Exchequer billions of pounds each year, according to a report by the Higher Education Policy Institute (Hepi).

It comes as ministers prepare a response to a review of higher education which recommended last year that tuition fees should be capped at £7,500.

The Government will also publish a skills white paper today which sets out plans for a massive expansion of students loans to cover vocational and technical courses as well as degrees.

The Hepi paper argues the loan scheme is “so flawed that there is no realistic way in which it could be revised to make it workable”.

Under the current system, students take out loans for up to £9,250 a year to cover their tuition fees. They pay them back out of their earnings after they graduate, but if they have not been repaid within 30 years they are written off, and the Exchequer effectively foots the rest of the bill.

The Hepi report points to an analysis by the Office for Budget Responsibility which found that only 17 per cent of graduates will fully repay their loans.

It argues that they should be replaced with a scheme that removes the debts incurred by students, enable costs to be shared more fairly and potentially reduce the cost to the Exchequer.