Another week, another study showing that British universities are offering ‘Mickey Mouse’ degrees whose graduates can expect to earn less than their non-graduate peers, even five years after finishing their course.
Not only is this very much sub-optimal for the graduates themselves, but it’s a drain on the Exchequer. Put bluntly, those institutions are making us collectively poorer by running course that offer a negative return on investment. Nor is this simply a case of a few low-value courses – an OECD report a few years ago found that almost a third of British graduates were doing jobs that don’t require a degree.
Clearly something must be done to remedy the situation – but what?
The basic economic problem here is that the system does nothing to make people bear the costs of their choice of degree, be it Wildlife Media or Football Studies (two of the courses mentioned in the latest report). You only pay back your student loan if you end up in a job with a reasonable income.
Below about £20,000 a year in income (full numbers here) you pay nothing back toward the cost of your university education at all. This is about 80% of median individual income (currently around £25,000 a year). Eventually the outstanding balance is simply written off. So, the longer you earn a modest wage, the less you have to worry about paying back the educational capital that has been sprayed up the wall.
On the other hand, if you do a course – say, Finance, Economics or Law – where you can expect a high post-graduate salary, you are not only going to end up paying more income tax, but you will likely pay back the full cost of your education, plus interest (which is currently a whopping 12%).
When it comes to the costs of university, the usual ‘progressive’ argument about those with the least money paying the least tax means that incentives are completely warped. Those who do courses that lead them into the most gainful employment pay far more than those who do something that takes their fancy but then don’t end up earning much – does that strike anyone as particularly fair?
Instead, we should turn things on their head. If you do a course that has very good graduate outcomes, with all the juicy income tax that comes with it, you don’t have to pay back the loans that got you into that enviable position. If, on the other hand, you spend your time and our collective money on a low-value course, we’ll have that cash back, with interest. After all, the argument always made for widening access to university was that it makes all in the country richer. If that is the case, we should subsidise the courses that leads to higher wages, and be ruthless about those that are a drain on the public purse.
The Australian government is, in fact, already trying a version of this principle by charging higher fees for humanities degrees than for STEM subjects. That’s not the worst idea, but it still runs into the age-old problem of government price-setting, which is the very issue that needs to be solved here in the UK. At the moment we have an absurd situation where a higher fee cap was intended to introduce competition for students, but simply ended up with almost all courses costing the maximum.
We need something more radical, which creates the right incentives. The simplest way of doing this is to remove the threshold for repaying tuition fees. The moment you start earning after graduating, whatever your job, you start repaying the cost of your degree, and without any writing off or loan forgiveness down the line. On the other hand, any tax you pay at the higher tax rate (the current 40% one) is treated as a repayment of your student loan. That you are paying higher rate income tax is proof perfect that society values your skills and output. You have put that three-year training to good use and are adding value to society.
As it happens that 40% rate kicks in at about the 80th percentile of individual incomes. So, to get incentives right on student loans the proposal is that those in the top 20% of the income distribution just pay their normal tax and have their loans written off pro rata as they contribute their higher rate tax payments. Everyone else has to repay their loans in full, with interest.
There is, of course, one very big problem with all this. It’s entirely sound economics, but terrible politics – which is why we’ll carry on with ‘popular’ but economically deleterious system that actively incentivises people to make poor choices. Which is just another reminder of how difficult it is to run the economy properly within the constraints of politics.
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