Ridhingra,
I think many of us have experienced being labeled as overqualified for certain jobs at times, which can feel a little odd. Perhaps the person was in need of a job and had to hide his certifications and degree to seek employment.
However, now he cannot claim this. As suggested by Nashbramhall, he may lose his job because he concealed the information. The company can decide whether or not to continue his services. But surely he cannot claim from the company that because he is a graduate, he should be paid more.
In certain places, they require uneducated skilled/unskilled laborers. For example, the Mumbai Dabbawallas do not hire graduates even if they are in deep debt. Similarly, Lijjat Papad, a trust, hires uneducated women who are skilled in making pickles and papad.
If I were to seek employment with them by hiding the fact that I am a graduate, I may get a job that offers me a basic pay. However, I cannot demand higher pay in the future by stating that I am a graduate.
Organizations clearly state whether they require graduates or not. The company has its own budget, and if they cannot afford to pay more, they should not accept the job, but they cannot demand higher pay.
I would like to share a personal example from my family. My father is a medical doctor. When he was young and had just graduated, my grandfather passed away. He tried to find a job but was unsuccessful. During one interview, the interviewer looked at his certificates, asked for tea, and over the tea, advised my dad to stop looking for a job because he was overqualified and no employer would want a doctor doing such petty jobs.
I hope this helps you make a better decision. Humbly inform the person that a pay raise cannot be afforded, especially since the job is meant for uneducated/unskilled individuals. Present your point in a humble yet firm manner.
Regards.