By Paul Goodman

Screen shot 2010-10-11 at 16.05.36 Policy Exchange is probably closer to the Government than any other think-tank.  So any paper it releases on student finance is worth keeping a special eye on – especially if it coincides with Ministerial pronouncements and a special report to them on the matter.

The think-tank has today issued a research note by Nicholas Barr, Professor of Public Economics at the LSE.  Its proposals look very similar to those floated over the weekend by Vince Cable, which according to some reports will also be proposed by Lord Browne tomorrow in his report to them on the matter.

According to Policy Exchange, Barr's plan "outlines a new way to run student loans that will save taxpayers' money while making sure that everyone equipped with enough talent and ambition can go to university".  The think tank claims that "the proposals would see interest repayments on loans match the actual cost of borrowing by the Government", and that its main features are as follows –

  • "Low earners would still be protected thanks to an exemption on repayments for earning under a set figure, currently £15,000 pa.
  • Those on low lifetime earnings would still have their loans written off after 25 years. There would also be subsidies to prevent the "real" level of individual debt rising for those unable to make repayments.
  • As well as a more realistic interest rate, extra cash would also come for an extension of up to a year in repayments – at 9% per cent of income – for those managing to repay their loans quickly.
  • This extra set of repayments would effectively amount to the so-called "graduate contribution" but without the disadvantages of a full graduate tax.
  • To avoid unduly punishing high earners, the extra cash could be limited to a maximum of 120% of the original loan in present value terms.
  • The entire system could be financially self-contained, with higher earners effectively subsidising lower earners but eliminating the current loan subsidy of around £1,000 per student.
  • Echoing work by Professor Neil Shephard, the note suggests that loans for fees and for living expenses could be split, with a higher threshold for the fees loans. That would mean no one earning less than £30,000 would ever be asked to repay the cost of tuition.

Professor Barr commented: "The extra years are at the end of the repayment period, when a person's earnings are typically considerably higher than earlier in his/her career. 

"Thus the extra income to the loan system is substantial.  Higher earners pay more in additional repayments than lower earners; and the lowest earners pay no extra because of the 25 year rule."

Policy Exchange director Neil O'Brien added: "At the moment the loans system runs at a loss. One way this could be fixed is by asking graduates to carry on paying 9% of their income after they have paid off their original loan, for up to a year or a maximum total of 120% of the cost of their loans.

"This would increase the amount we pay for university, but the structure Professor Barr outlines would also mean redistributing some income from those who do well following their university career to who don't – avoiding the problems of a full-blown graduate tax while keeping the advantages of fees." "

Three quick points –

  • O'Brien suggests that Policy Exchange's plan is a graduate tax of a sort, but not a "full-blown" one.  Vince Cable did the same over the weekend when he said that the Coalition doesn't support a "pure" graduate tax – thereby suggesting that its favoured scheme contains an "impure" one.  The phrase that the Government's using to describe its hybrid plan is a "progressive system of graduate contributions".
  • It can be argued that if the Government's scheme is "financially self-contained", then the new "progressive contribution" isn't a tax at all – just a transfer of money from better-off students to less well-off ones.  But Professor Barr says only that such a scheme "could" be self-contained, and suggests that better-off students will have to pay back more than their original loan "in present value terms".  I suspect that many voters will conclude that if the arrangement looks like a tax then it is a tax.  There's a strong case for arguing that Universities should be free set their own fees, as long as they provide subsidies for poorer students.  Under the Policy Exchange/Coalition plan, the burden of providing those subsidies would effectively fall further on higher earners, many of whom are already making a contribution to them by paying higher rate tax in the first place.
  • But if it can be claimed that the Government's proposal doesn't involve a graduate tax, why aren't Ministers saying so?  As so often, the answer's about the politics of the plan rather than its content.  Conservative MPs may not want to hear the words "graduate tax", but Liberal Democrat MPs do: they want to persuade voters – and themselves – that the proposal isn't just about hiking tuition fees.  Hence Cable's insinuation that the plan involves a graduate tax of sorts.  Hence a "progressive system of graduate contributions".

9 comments for: After Cable’s letter but before Browne’s report, Policy Exchange sets out how the Government’s hybrid student finance plan may work

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