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The tripling in tuition fees was supposed to save the government money – but the rate of default on student loans is so high that the write-offs look set to wipe-out any benefit to the public purse. This bad news will only embolden those within the Labour Party who want to replace the current financing system with a graduate tax.

Given the failure of loans, would this be such a bad thing? Writing for the Times Higher Educational Supplement, Emran Mian argues that it most certainly would:

“The primary reason to reject a graduate tax is that it replaces the finite and time-limited ‘debt burden’ of tuition fee loans with a tax burden that is unlimited both in terms of the total amount due and the period over which it is to be paid. I have always struggled to understand why this would be better for students. Wouldn’t most graduates prefer a time-limited repayment of a fixed amount?”

A graduate tax could provide a future Labour Government with an undercover means of increasing income tax. Indeed, one would not put it beyond a Labour Chancellor to apply a graduate tax retrospectively to those who graduated before the advent of tuition fees – all in the name of ‘fairness’ of course.

Also, if a graduate tax operated at the same threshold as income tax, it would hit people on much lower incomes (compared to student loan repayments):

“…everyone earning over £10,500 would have to make a contribution; loan repayments don’t begin until you’re earning over £21,000. You could play around with the details of the graduate tax to change that, but then you could play around with the details of loan repayments, too.”

Another big problem with a graduate tax is that its revenues would have to go through the sticky fingers of the Chancellor before reaching the higher education system; can we really be sure that a hard-up government wouldn’t divert the money?

Then there’s underlying ideological motivations:

“Ultimately, the priority for advocates of a graduate tax is probably to reduce marketisation in higher education. The core problem with fees, as they might see it, is variability… The 2010 Browne Review, for which I headed the supporting civil service team, did explicitly seek greater variability in fees. We wanted universities to be forced to think harder about how and what they taught, for those choices to show up in fees and for students to evaluate them when making application decisions.”

In practice, there’s been very little variation in fees – and thus no marketisation. But far from being an argument for the current system, this is further evidence of its failure. Higher education institutions are under no real pressure to maximise the future prospects of their students – as long as a university gets the fresh meat in through the front door, then its tuition fee revenue is guaranteed.

Unless universities bear some degree of financial risk they will have no reason to innovate and drive down the costs of the education they provide.

Emran Mian hints that there may be an alternative to both the current system and a possible graduate tax:

“Advocates of a graduate tax might respond that it is possible to create a tax that doesn’t last for life, or that caps total payments – but then we’re talking about something more like repaying a loan.”

Except that it wouldn’t be a loan. Firstly, there’d be no debt – but rather a deal to pay the university a ‘commission’ on earnings above an agreed threshold, at an agreed percentage rate and up to a maximum cumulative amount equal to the tuition fees for the courses undertaken. Secondly, there’d be an element of risk and reward for the university – in that the higher the earnings of the graduate, the faster the payment of the tuition fee.

Just as importantly, such a system wouldn’t be a tax, because the money collected wouldn’t go anywhere near the Treasury – but would go from the graduate, via a bank account designed for the purpose, to the university.

Obviously, there’d be a transitional period, in which the government would have to put up the bridging finance. However, this would be temporary and would deliver a graduate population without debt and a higher education system without complacency.

15 comments for: Student loans versus a graduate tax: we need a third option

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