21 August 2018

The case for a graduate tax

By

University pays. Over the course of her life, a woman will earn £250,000 more as a result of going to university compared to going straight into work; for men, the benefit is £170,000. The average graduate earned £10,000 more in 2017 than the average non-graduate. To those who are capable of securing a place, it is a lucrative enterprise.

The flipside is, of course, that those who do not go to university stand to earn less. But for Labour leader Jeremy Corbyn, a free place at university paid for by the taxpayer is an irrevocable, “fundamental” right. Yet why should lower earners, for whom the reasons not to attend university are many and varied, subsidise the incomes of those destined to become much richer?

One much-maligned resolution to the problem of university funding is a system of tuition fees, in which payment is delayed. The current loan system, started by Blair in 2004 and extended significantly by the coalition, has been a punching bag at more or less every subsequent election. But it does many things well. You don’t pay a penny towards it until you’re earning more than £25,000 a year, and it doesn’t affect your credit rating nor show up in any reports.

Moreover, the debt is written off completely after 30 years regardless of how much is still outstanding. In fact, three quarters of student debt will never be paid. This makes intimidating figures about the sheer scale of student debt (the average is over £50,000) deeply misleading.

The current system only takes income from those who can afford it, and only when they can afford it.

While the principle behind tuition fees is sound, however, the execution is far from perfect. The idea that, as a teenager, you will decide to take on the possibility of tens of thousands of pounds worth of debt – which will stay with you for the best part of 30 years – is understandably alarming. This risks putting off the poorest students most of all, whose enrolment to universities has plateaued in recent years despite persistent prior increases.

Then there’s the mind-boggling £100bn of student debt that the government owns, a colossal liability given that much will never be repaid. This figure could double within five years.

Additionally, the system still offers a couple of get-out clauses to richer families, who by paying off their debt sooner avoid also paying the interest on that debt which accumulates over time. Similarly, because they need fewer loans, they often end up with far less debt than their poorer colleagues.

What is the alternative? A Graduate Tax, where students receive grants while they study and pay a flat tax rate after graduating. It would boost funding, get more disadvantaged students to university, and make richer families pay their fair share.

Let us first look at the levels of debt accrued by different groups. Poorer students can expect to demand much greater amounts in loans, particularly since the scrapping of the grant system, while the richest can rely on parental support for some or all of their scholarly funding. Note that even then this money is rarely sufficient: 67 per cent of students, a full two thirds, work while studying to fund their degree.

The impact of this is that the richest 30 per cent of students end up with around £42,000 worth of debt, compared to £57,000 worth held by the poorest 40 per cent.

Other loopholes mean that the rich, paradoxically, pay less. Why only pay off the bare minimum, and face bloated interest rates of 6 per cent per year, when you could pay it all off straight away? This benefits neither the poor, who will likely have their income slashed until long after they reach 50, nor the Treasury, which loses any money it would have gleamed from interest. A graduate tax would mean that everyone, regardless of the size of your family savings, has to pay for the full period.

Finally, we must decide who we are trying to best help. The richest will go to university regardless of how much it costs or how much debt you have to take; the poorest will not. And it is not simply enough to get there. For disadvantaged students who make it to university, the number of dropouts hit a five year high in 2017.

Meanwhile, 56 per cent of all students say that their financial situation is affecting their grades. It is naïve to assert that small increases in entry rates for the poorest students means the system is working. Living at university is becoming ever harder, and there are plenty of students that would benefit from going that can’t. Society would certainly benefit too.

So how to fix this? Taxing graduates at the same rate as loans that must be paid back, 9 per cent, would ensure everyone pays the same regardless of how much funding they need without increasing the current burden. Such a system would end the strange paradox whereby those most able pay the least, and expanding grants using the extra funds would give students more money in their pockets. And, though this is not much more than a rebranding, it would burst the big black cloud of debt that pushes many deserved pupils away from higher education.

And yet, it keeps the best features of tuition fees. Yes, people pay for their own university education, but they only do so as and when they are able. It is not such a cumbersome tax as to disincentivise work, but it means that you don’t pay for an education that doesn’t benefit you. And furthermore, it forces graduates to make a very real financial decision. Is the cost of tuition – 30 years of higher taxation – worth the benefit it will bring?

When it comes to tuition fees, sound logic has been let down by poor execution. Someone must pay for tuition, but when it’s the state this can come at the expense of helping poorer students in schools and colleges, as the Scottish example is beginning to show. Tuition fees are a flawed way of doing this: a graduate tax would fix their teething problems and provide education for anyone who wants it.

Josh Freeman is studying PPE at the London School of Economics.