University graduates can face effective marginal tax rates of up to 71% when student loan repayments are taken into account, while the financial benefits of obtaining a degree have declined, according to a new report from the Institute of Economic Affairs (IEA).

The report found that graduates earning between £29,385 and £50,270 face an effective marginal tax rate of 37% once income tax, National Insurance and student loan repayments are combined.

For higher earners, the burden can be significantly greater. Graduates with incomes between £100,000 and £125,140 can face effective marginal tax rates of up to 71%, reflecting higher-rate income tax, the withdrawal of the personal allowance and student loan repayments.

The report, Higher Education Delusion: What's Gone Wrong with the UK's Universities?, examines university finances, academic standards and the value of higher education, arguing that the sector is failing to deliver sufficient benefits for either students or taxpayers, as many graduates now leave university with very large student debt balances.

It also points to a decline in the graduate earnings premium. Research by economist Julian Jessop found that the earnings advantage enjoyed by graduates aged 21 to 30 has fallen from around 35% in 2007 to 25% in 2024. At the same time, around 30% of graduates are now employed in non-graduate roles, raising further questions about the economic value of some degrees.

The book, edited by Professor Len Shackleton, also highlights concerns about academic standards. Average university entry scores across seven major subjects fell from 135 to 124 between 2019-20 and 2023-24, while the proportion of students awarded first-class degrees rose from 7% in 1993-94 to 30% in 2024-25. Overall, 79% of graduates now leave university with either a first or an upper second-class degree.

The report further examines the sector's growing dependence on international students, whose tuition fees accounted for 47% of total fee income in 2023-24.

Among its recommendations are allowing financially struggling universities to fail, requiring institutions to share the financial risk associated with student loans, concentrating research funding on leading institutions, strengthening free speech protections and encouraging greater competition from new providers as artificial intelligence reshapes higher education.

Shackleton said: “For decades, young people have been told that going to university is the surest route to a better-paid career. But for growing numbers of graduates, that promise is no longer being fulfilled.

“Students are taking on substantial debts, taxpayers are underwriting the costs, and universities face too little pressure to demonstrate that their courses deliver value.”

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