Fees, loans, tax and fairness

The idea of a graduate tax and radical reform of how universities are funded has come to the fore yet again.  The Labour leadership has been far too shy in accepting that they have painted themselves into a corner on the issue of student fees and loans. What has evolved over many years since they have been in opposition has become very messy, unequal, and is crying out for reform.  Instead, recent reports that the promise of no fees is gone, replaced by yet another review, add to the cringing uncertainty. TEFS has been in favour of levying a graduate tax on those who benefit the most. This includes employers and graduates who earn more. It means no fees are possible and those who benefit the most pay the most.

In February, TEFS broached the issue of a fairer system to fund students and universities with, ‘Labour, fees or a graduate tax and the elephant in the room’.  The Labour party had yet to go back on its manifesto promise of 2019 to abolish student fees despite the obvious drawbacks, such as having to cap numbers. Then there was Keir Starmer’ leadership social justice pledge to “support the abolition of tuition fees and invest in lifelong learning”. It seems this is now open to more debate as Labour plan to open a consultation on the way forward.

By the start of this month, just before the council elections in England, the news slipped out that  ‘Labour to ditch its promise to abolish tuition fees in England’.  This revelation probably had little effect on the election outcome but retaining fees and loans is unlikely to attract younger voters who feel very hard done by.

The consensus appears to be that Labour will take a path of least resistance and tinker around the edges of a failing system.  Bringing back maintenance grants and suppressing more rises in fees will not be enough. Inflation is eroding the quality of education on offer and students are lowering their expectations as more divert their attention to part-time jobs.

TEFS view.

Whatever system is put in place to fund universities and degree courses, it must have attributes that meet the ‘social justice ‘pledge. It must ensure that there is equality of access to, and equality for learning in, every university and college. While the idea and these aspirations are simple ones, it seems that fear of the complications, and possible knock-on effects of reform, are stalling effective decisions.  We should never fear that reform will require a complex and radical plan that smooths out the rough edges of the prevailing unequal system of today. It’s not an excuse.

Follow the money: who pays?

An obvious statement at the start is that universities are expensive, especially if quality is to be ensured. Constant cuts in funding and erosion through inflation is not an option. Quality is bound to take a hit. But the funding must come from somewhere.  Simply put, there is no such thing as a ‘free’ education.  The simplest approach is to tax all businesses and everyone’s income at a level sufficient to fund university places.  This is the approach taken in Scotland where there have been no tuition fees levied since 2008.  The costs come from all taxpayers, whether they have been at university or not. It assumes we all benefit from the education of graduates.

Reconciling differences across the UK.

A major task for a new government would be to address the glaring gap between policy in Scotland and the rest of the UK. Adding a graduate tax in Scotland might be met with a degree of scepticism. The easiest position for a new government might be to default to the system in Scotland. After all, people in Scotland already pay more tax than those in the rest of the UK and there are no fees or loans in Scotland. Having the same system across the UK has great advantages with all the UK paying more in tax. A graduate tax would have to displace the overall tax differential in Scotland. However, despite this approach, the combination of student number caps, and not enough funding from the government, is pressurising the university system across the board. Those universities in Scotland and across the UK that are able, strive to attract as many foreign students as possible and their higher fees subsidise the rest. However, even this is now not enough. It leads to the astoundingly perverse plea from the head of Edinburgh University, Peter Mathieson, asking for wealthier families to pay for places to help prevent “talent and money” leaving the country. That would be a step too far but illustrates the situation in which many universities find themselves. It seems equality and fairness may be too expensive in some eyes but these sentiments must be resisted in a progressive system.

A progressive payment system is fairest.

The great advantage of general taxation is that it must be progressive with the highest earners paying the most.   If graduates generally earn more, they end up paying more. On the other hand, a system of fees and loans is inherently non-progressive once a threshold for repayment is reached. Ongoing pay inflation means that the lowest paid will eventually end up repaying the same as the highest paid.

Those from less advantaged backgrounds also pay more through tax as they benefit from earning more. Earlier this month the Centre for Transforming Access and Student Outcomes in Higher Education (TASO) reported clearly on ‘The value of higher education’ (pdf).

“Higher education is linked to clear economic benefits for disadvantaged students; however they consistently earn less than graduates from more advantaged backgrounds”.

Those who benefit should pay more.

This is again a simple principle. It might seem complex when acting upon it, but it’s not impossible. The current loan repayment system is far too complex and pushes all the cost burden onto the students and graduates through fees and loans.  More recent moves by the governments outside of Scotland have increased the burden.  Extending the loan repayment period, alongside lowering the repayment earnings threshold, means that the poorest pay more in time.

Some argue that the current loan repayment retrieved through the tax system of HMRC.  It certainly has the feel of a graduate tax as pay lands each month.  Martin Lewis in the Observer last week argued that,  ‘We must stop calling it a student loan’ He is right with the observation that the new repayment regime,

“will work far more like a graduate tax. For most people, it will be like a 9% additional tax burden above the £25,000 threshold”.  Lewis is correct in noting that, “Those on lower to middle incomes are going to pay a lot more because they are repaying for longer. And those on the highest incomes are going to repay more quickly, and are going to pay less”.

Make the employers pay more.

A report in 2018 by Johnny Rich ‘Fairer funding: the case for a graduate levy’, published by the Higher Education Policy Institute (HEPI) made a compelling case for employers paying for graduates they hire.  The knock-on effects of such a move were explored by TEFS in ‘Follow the money: the illusion of a graduate levy on employers’. The flaw in the argument is that some employers might opt for cheaper foreign graduates or employing fewer UK graduates. However, it would not be unreasonable for employers to make some contribution via an add-on to corporation tax. This would fit with the philosophy underpinning a ‘progressive’ taxation regime.

As an aside the lifelong learning entitlement (LLE) progressing from 2025 will allow people to “access loans worth the equivalent of four years of post-18 education (£37,000 in today’s tuition fees)” up to age sixty. This puts all the costs onto the shoulders of the student and none onto the employer who gains from the skills. This is not acceptable. Employers could even resort to pressing their employees into training at their own cost. I think we need to watch this space carefully.

Ensuring fairness.

More evidence is piling up to show that the current system of loans, and especially the reforms coming in soon, are just plain unfair.  A detailed report from London Economics earlier this month, ‘Alternative options for higher education fees and funding for England’ (pdf), set out the result of modelling repayments across different income groups. The results lay bare the government strategy of favouring the better off graduates. The government proposals to reform the loan repayment system in response to Augar last year were modelled in considerable detail and,

“The result is an effective subsidy from low-income and middle-income graduates to the highest earning graduates. The proposed changes are, therefore, regressive”

For example, a graduate earning around £37,000 by 2030 would pay back as much as £63,100 over their career. Yet, a graduate earning twice that much would pay back only £55,000. The fact that this is not an accident, and a deliberate policy, should be considered when challenging the perverse system now in place.

Even the government’s own ‘Higher education policy statement & reform consultation: Equality analysis’ from February last year admitted that there would be a greater negative effect on those less advantaged. This was followed up in January this year by the House of Lords  in its ‘Twenty Fifth Report to parliament’ where they conceded that the reforms were saving money for the taxpayer, but,

“We are concerned that the design of the policy, which leads to students from disadvantaged backgrounds being among the ‘losers’, is inconsistent with the Levelling Up agenda”.

Avoiding graduate taxation.

There is no doubt that a graduate tax will spawn a whole new industry in tax avoidance.  The same would hold if there is a levy on employers hiring graduates. One argument is that graduate simply moves outside the UK for work and pays tax elsewhere. The impact of this effect would have to be assessed and countered in some way.  Instigating an education account for every graduate would quantify the real cost.  Repayment would be suspended while the graduate is living and working in the UK. Upon leaving the UK, a balance could be calculated, and they would become liable to start repayments on that balance. This would revert to a graduate tax band upon re-entering the UK. It might be worth noting here that many UK employers hire graduates from outside the UK elsewhere and benefit from the education funded by other governments.

Graduate tax is an old idea.

It has been rattling around all of the main political parties for a long time. It first appeared in earnest in 1992 from Gordon Brown. The idea of a mechanism for student loans emerged in 1990 from the dying embers of the Thatcher Government.  By the time of the Blair administration of 1997 the idea of fees and further loans was taking shape. The Dearing Report of 1997, ‘Higher Education in the learning society’ told the government that, “We conclude, therefore, that graduates in employment should make a greater contribution to the costs of higher education in the future”. Tuition fees emerged in the Higher Education Act 2004.

In a push to go further, the Browne Review ‘Securing a sustainable future for higher education: an independent review of higher education funding and student finance’ was set up by the Labour government in 2009.

It was attractive to the incoming Conservative government in 2010 in concluding that, “A graduate tax has some attractive features, but it is unworkable and it weakens institutional autonomy as well as the role of student choice”. This was considered to be a difficult challenge to the independence of universities, which would become entirely dependent on the government for funding. Yet universities minister, David Willetts, indicated that a graduate tax was the preferred option very late on in 2010 stating it was “by far the best option to go for in tough times”. This aligned with the view of his coalition partners who were getting understandably jittery about fees and loans. It didn’t happen and the seeds of betrayal were sown.

But the graduate tax idea did not go away. Education Secretary, Justine Greening, was ousted from her position in 2018 and departed the Conservatives in 2019 (TEFS 6th September 2019 ‘Justine Greening…Greening… Gone!’). Although she held the torch for disadvantaged students and social mobility, her plans for abolishing fees and replacement with a graduate tax were going too far for the advantaged establishment. It smacked of Labour policies and it’s a wonder she didn’t cross the floor to Labour.

The same is still the case and the argument rumbles on (see Times Higher Education June 2022 ‘Will Labour commit to an English graduate tax?). The House of Commons Library also provided a comprehensive review of the issues back in 2010. However, these problems are not insurmountable and a fairer system that is tax driven can emerge in time.

Making the transition.

A new government making the transition to a graduate tax might take some solace in recognising that the current repayment of loans looks like a tax and quacks like a tax. Perhaps that was the aim all along as a fall-back position. However, the transition might become messy and tangled in legal red tape. The solution of subjecting all new students to a graduate tax that is not done in retrospect might stoke feelings of unfairness in many quarters. This means existing loan repayments would have to be adjusted to match a graduate tax. This also means making the current system even more progressive.  If maintenance grants are reintroduced, then many in receipt of maintenance loans might expect to have their repayments for this part of the loan quashed.

It looks difficult, but gaining the higher ground of fairness and equality is well worth the effort.

The author, Mike Larkin, retired from Queen’s University Belfast after 37 years teaching Microbiology, Biochemistry and Genetics.


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