Politicians are keen to fix what is seen as a mounting political problem with student loans. An increasing number of graduates are pointing out that the Plan 2 loan scheme in particular imposes some painful and unreasonable marginal burdens on their earnings. After all, paying another nine percentage points of student loan charges on top of your marginal tax rate is a miserable experience. So too is the absurd interest rate charged on those loans, which is based on the RPI measure of inflation that, in almost every other regard, the government has conceded is unrealistic and unviable.

So we have a large number of graduates unhappy about their financial situation. Since those graduates are potentially significant – especially to the Labour party – in future elections, politicians of all sorts are keen to respond to their complaints. This has brought politicians and policy wonks scurrying with ideas for how to fix the system.

The bad news for all of them is that this isn’t really about the design of the student loan scheme. Bluntly, even the cleverest fix for student loan repayments will not address the root cause of graduate unhappiness and so will not fix the political problem here.

The regime of student loan repayment is implicitly based on two founding premises. The first is that wages will go up. This has, after all, generally been the norm for most of recent modern economic British history. The second is that being a graduate is worth it – that people who go to university will earn more than those who do not. Both of these premises are now under question in the UK.

On the first, on real earnings, the conveyor belt that used to annually carry workers up the income and wealth scale, delivering higher real wages and improved living standards, has, if not broken,  then ground to a halt. In the most recent past this because of higher inflation, largely triggered by the war in Ukraine and a number of other factors. In the longer term, Britain’s real wage stagnation dates back to the 2007/08 financial crisis. Since that shock, real wages in the UK have, for too many people, been flat at best.

And this is the real story of the student loan repayment crisis. Simply, graduates who have done the right thing – passed their exams, gone to university, graduated with a degree – find themselves in a situation where they are not, in fact, getting or feeling better off. That marginal cost arising from student loans might be a little bit more bearable if their real wages and standard of living were actually rising, but all too often they are not.

So can a policy fix for Plan 2 loan repayments solve what is making many graduates unhappy? Probably not, because their problems stem from an underperforming UK economy.

That takes us to the second premise underpinning the university loan scheme: the graduate premium. Here the picture is cheerier, but may be worsening. In the debate around student loans it is all too often overlooked that for many graduates, going to university remains a very good deal, in that over their lifetimes they will earn significantly more than they would have done had they not gone to university.

The graduate premium in the UK across the board is around 40 per cent, meaning any given graduate is likely to earn around 40 per cent more over their lifetime than any given non-graduate. However, there are many qualifications here.

One is that the graduate premium is very unevenly distributed across UK graduates. People who do certain courses – economics, sciences, medicine, for example – are very much more likely to out-earn non-graduates than those who do other courses. And those who graduate from higher-tier, more prestigious universities are again significantly more likely to enjoy a big wage premium over non-graduates than those who go to lower-tier, lower-prestige universities.

In a sense then, discussing graduates as one group is increasingly inappropriate for the UK, given the wide spread of experiences in that population.

The second problem for the UK graduate premium is that it is falling. It is already lower relative to many other developed countries. The OECD average graduate premium is around 55 per cent, well above that British figure.

And this takes us back to that problem with the overall UK economy. Why is it that UK graduates are enjoying less of a wage premium than those in other countries? This is not because, as some critics of the UK higher education sector would have it, that British universities produce worse graduates or that some of our institutions are weaker than those in other countries.

By way of illustration, consider that the graduate wage premium in both France and Germany is above that in the UK. That happens even though British universities are, bluntly, better than French and German universities for both research and teaching. This is not my jingoistic opinion – it’s the general view of pretty much every credible HE league table and comparative study.

Having a smaller higher education system is a defeatist response

The problem, in other words, is not with the British higher education sector or its graduates, but with the economy into which those graduates emerge on graduation.

The UK economy has underperformed, in that it has not supported the creation and growth of more companies doing the high-skill – and therefore high-wage – work that absorbs graduates and their talents and delivers for them a wage premium.

Quite simply, we have been producing more graduates than the underlying UK economy, in a narrow sense, currently needs. The consequence is that many graduates are doing jobs that are less demanding and less skilled than those their degrees have qualified them for. This skills mismatch is a particularly British problem. The OECD finds that about 37 per cent of UK workers are over-qualified for their job, well above the developed-country average of 23 per cent.

Here, some people will argue that this means we should have a smaller higher education system – that we need fewer graduates. That, however, is a defeatist response to what is essentially an economic problem, an argument that we should accept low productivity and wage growth.

The big picture around graduates, their earnings and their despair over student loan repayments is not really about the UK higher education system at all, or even the student loan regime. It is about the grim state of the UK economy.