The publication last week of an excellent series of essays asking, ‘How should undergraduate degrees be funded?’ by the Higher Education Policy Institute (HEPI) has opened up an important debate. It seeks answers to the question of the deteriorating higher education situation that is being avoided by the political parties bidding for power. However, there are other options for funding universities and undergraduates that were not considered. In turn, these were not modelled by London Economics and not put to students in a survey by UCAS. TEFS has consistently argued that a fair and progressive graduate tax on employers and students would be best achieved through a levy on National Insurance (NI). But could it be the incumbent government seeks to scrap NI to cut Labour off at the pass?
The baseline principles to build upon.
The first important point is that a ‘no fee’ policy subsidises the families of many students when they can afford tuition and maintenance. In the past, this has been most students at many universities. Instead, TEFS has favoured the idea of a graduate tax, but also a system that makes all the stakeholders and beneficiaries pay their fair share. TEFS has stressed that any financial burden for students at university must be shared amongst the main stakeholders (see latest call TEFS 9th March 2024 ‘University and College Funding: Firing the budget ‘popgun’). These are the employers of graduates, graduates, and wider society. This would be more easily achieved through a graduate levy on National Insurance.
Standards and fair access.
Overarching the need to reform student fees is the need to ensure fair and equal access alongside high standards. Anyone who thinks that declining funding for universities is not affecting standards is deluding themselves. Income from overseas students is putting a brake on this decline but that too is under pressure. Part-time jobs and commuting students are driving timetable adjustments, resulting in less contact in lectures, tutorials, and ‘practicals’ in most universities. A wave of course closures and redundancies is sweeping across the sector. It is hitting post-92 institutions first but will continue to others without being addressed urgently.
This is having a real effect on how much can be studied by students and has been in decline for several years. Regardless of the intellectual challenge, the amount studied sets an attainment standard that is being eroded even faster. Many employers hiring graduates would have a clear take on this.
The solution is somewhat simple. Firstly, maintenance grants must be introduced. Secondly, it is likely that adequate maintenance loans would also have to be offered to uplift the current inadequate offering. The number of hours working part-time would have to be strictly limited as part of a ‘study time contract’ between the student and their university. The aim is to increase the study time at university and ensure all students have equal time to study.
The only view that will count.
This view comes from the nascent Labour administration’s plans waiting in the wings. They have modelled various scenarios but are determined to keep their powder dry. However, there have been some big hints. The biggest came from the Shadow Education Secretary, Bridget Phillipson in an interview with Laura Kuenssberg on 7th January this year (below). The clear inference is that a ‘no fees’ plan is not being considered and a more progressive payment system would be introduced. The expanding problem of students having to spend more time in jobs would be also addressed.
This reiterates what the shadow universities minister, Matt Western, said in a speech at Exeter University. He stressed that the latest system of repayments of student loans being introduced in 2023 was not progressive enough. When asked if it was fair that those students holding down jobs had less time to study than those with no outside jobs, Western agreed it was a ‘two-tier’ system. This may be the first time a politician has openly acknowledged this disparity in the ‘university experience (see TEFS 14th July 2023 ‘Wake up and smell the coffee: Shining NEON light on widening access and participation’). Rumblings at the Scottish Labour Conference earlier this year were related to reaching an agreement for student funding across the whole of the UK (see TEFS 20th February 2024 ‘Funding students and universities: the distant elephant in the room for Scottish Labour’).
Currently, in England, all the burden is on students and graduates through loan repayments plus interest extending for 40 years. This is unfair when employers and society in general also benefit. The cost is far too high for students.
Elsewhere in the UK, there is a messy mixture of student and state funding that is well presented in recent reports for the Nuffield Foundation by London Economics. See General Election Briefings: Examination of higher education fees and funding across the UK – February 2024 – London Economics (pdf).
Since loan repayments are gathered via the HMRC tax system, any rational person would view this as a ‘graduate tax’ in all but name. But it is not very progressive and is viewed as favouring the better off. So, a move to a graduate tax could be viewed as a more honest and fairer way.
The HEPI proposals.
The proposals presented by HEPI last week in, ‘How should undergraduate degrees be funded? A collection of essays’ (pdf) are highly useful in gauging the feasibility and impact of five possible funding systems for students in higher education. These are accompanied by financial modelling by London Economics which have looked very carefully at the impact. Additionally, UCAS has produced the results of a new survey of 3,155 prospective students who are considering higher education (or have applied to attend university in the future).
However, the idea of a graduate levy from National Insurance was not considered.
Students were asked about their ‘likelihood of applying to complete an undergraduate degree at a university’ and their choice of university.
Two of the proposals gathered the most support from students.
First, it came as no surprise that a scheme for a graduate employer levy by Johnny Rich (Chief Executive of the Engineering Professors’ Council and Chief Executive of the outreach organisation, PUSH) led in popularity. This is because there would be no fees for students to repay and universities would take out government loans to fill the funding gap. Maintenance loans would resume as would support for general taxation. This is a clever scheme that has merits in that it shares more of the costs. But it would be complex to administer and puts an undue burden on the employer.
Second in the popularity stakes came ‘Dismantling the marketisation of higher education’ from Chloe Field, Vice President of Higher Education at the National Union of Students (NUS). This essentially scraps fees but retains some maintenance loans.
The rest were not well supported with ‘Fixing higher education funding should start with student loans’ from James Purnell, President and Vice-Chancellor of the University of the Arts, London coming next. This proposes the status quo but introduces a more progressive stepped repayment scheme. It may be that this happens as an easy adjustment to the existing system.
Bottom of the pile was ‘Increasing tuition fees linked to an institution’s TEF award by Jo Johnson (aka Lord Johnson), former Minister of State for Universities, Research and Innovation. This reveals that the thinking of the government hasn’t changed, and differential fees are still on the table as originally planned. It is a non-starter for too many reasons to develop here.
A separate proposal for a graduate contribution in Scotland is noted below.
But close your eyes and imagine a system where only the rich can afford the best universities while other universities flounder and degrade in a downward spiral. To paraphrase Jake Brigance (sometimes misattributed to Atticus Finch)
‘Now think of privatisation’.
National Insurance Graduate Levy.
If it is accepted that the main stakeholders are graduates, their employers and wider society in general, it follows that they should all share the cost. The simplest way to do this is to put a graduate levy onto National Insurance with both employer and graduate paying their share. This would be applied across the UK and would serve to unify the system for all students regardless of which jurisdiction they come from.
The government in Scotland might choke on the prospect but their further restriction of numbers and cuts in university funding might look feeble in response. The Scottish Funding Council is making even more cuts of around £28 million this year despite higher income tax in Scotland. Out of the HEPI proposals, the last scenario 5, ‘A graduate contribution model in Scotland’ from Reform Scotland achieved some support but not as much as the existing ‘no fees’ policy. Unfortunately, the ‘contribution’ sought to apply a partial fee after graduation, and it would be subject to interest when paid back over time.
All students across the UK might warm to the idea of a common shared cost system where they pay less in a very progressive system. For Scotland and Northern Ireland, the trade-off would be an easing of the current tight restrictions on student numbers.
The government would also need to step in to fund strategic subjects that might be more expensive. Quality would also be a factor in targeting investments, with resources and facilities matched to student numbers. Those students would be supported to enable them to fully partake in a degree programme on an equal basis.
The upshot would be graduates generally paying less, but it would be progressive and linked directly to the increased earnings arising from achieving a degree. It would also release the latent talent currently excluded or hampered by part-time jobs.
What is National Insurance?
National insurance has been around in the UK since 1911. However, its present form has been in place since 1948 as part of the welfare state social contract. Introduced by a Liberal government in 1911, the National Insurance Act 1911 was expanded through sweeping reforms by a Labour administration in the Welfare and Insurance Legislation between 1946 and 1948.
There are various classes of NI with the main sources being employees and employer contributions. Self-employed and voluntary contributions also feature.
It is the second largest tax in the UK and most is paid directly into a ‘National Insurance Fund’. It lies at the core of the welfare system.
This largely covers ongoing state pensions and welfare benefits. However, it is not strictly ringfenced. Before it is paid into the fund, it is top-sliced to help pay for the NHS. This is not made clear on the government website. The Office for Budget Responsibility (OBR) in a recent report even goes as far as stating,
“A small amount is notionally directed to the NHS, although this only makes up a small proportion of NHS funding”.
This is somewhat misleading. It is not a small amount at all. Delving into the latest Great Britain National Insurance Fund Account for 2022-23 reveals the following,
“The NHS allocation is paid over by HMRC to the NHS before any contributions are paid into the NIF and so the figures shown are net of this NHS allocation. The NHS allocation was £41.8 billion in 2022 to 2023 (£29.1 billion in 2021 to 2022) and forms part of the total NHS funding”.
Generally, around 20% is taken for the NHS at the outset. It is this mechanism that should be used to top slice the graduate levy to fund students and universities.
The benefits of a graduate NI levy.
The simplicity of NI, and its application to employers, employees and self-employed, makes it an ideal vehicle for a progressive graduate tax. The main benefits are that it is:
Inflation proofed: With fees currently frozen, and graduates finding 100% of the burden falling on them increasingly unacceptable, the pressure on universities will break many in time. The NI levy would be tightly linked to pay inflation and rise as income rises. This is why state pensions can expect to advance with inflation.
Progressive: There would be a direct link to earnings. The question of where to set thresholds in incomes to match graduate earnings will be an issue. But lower earners might expect to not pay the levy.
Based on earnings only: The levy would not operate like a general income tax. It would not affect any other income that is not linked to earnings. It would only apply to pay gained through being educated to degree level. It does not tax capital wealth.
Directly funding universities: Clearly, it would be fair to fund universities on a pro-rata basis. A combination of popularity aligned with quality and standards regulation would back this up without a need to set a strict number cap.
It also would obviate the need for a strict numbers cap and make UK students more attractive. The need for a cross-subsidy by large numbers of foreign students on higher fees would become less of a problem. However, in any system, the numbers would tend to approach a natural limit. This could be set by the facilities available, and not funding available, to ensure standards and quality. This could be done involving a body such as the QAA, and certainly not TEF. It would also need to be subject-specific and not an institution-wide assessment. A reformed regulation body or at least a major overhaul of the Office for Students (OfS), which has come in for considerable criticism, would need to be established (see TEFS 5th October 2023 ‘End of term report: the Office for Students must do better’).
Some pitfalls.
Clearly, the overhaul would be significant and require new legislation to bolster confidence. A major issue would be transitioning existing graduates on loan repayments to the new system. There are already too many different repayment plans that need to be reconciled, with the latest being the most punitive, especially for middle-earning students. This indicates that the new graduate levy would have to offer lower repayments for students at the outset. A shared cost approach makes this possible.
Many better-off students will have observed that wage inflation might dilute their current loan repayments over time. Thus, they should not feel the pinch as they move into higher salaries. A levy would mean they might pay more than other less well-heeled students. But of course, that is the whole point of NI in the first place.
Public services, such as the NHS and education, rely on large numbers of trained graduates. This means those employees would also have to contribute. The government would have to offset these additional costs and protect key strategic industries.
Some employers might seek to preferentially employ non-graduates or only pay new graduate employees below the threshold set. Others may simply seek to employ foreign graduates. But this problem should dissipate as the job market adjusts to demands for a better-educated labour force. A Cost-Benefit analysis of skilled and able graduates would see the levy as a minor problem in a wider context.
Putting the levy into context: What will it cost?
I have heard many observers state ‘We cannot afford it’ when talking about funding universities. This is used to blindly justify asking students to bear all the costs.
But we might also ask ‘Can we afford not to invest in our students and universities?’
It is well worth looking at the cost of a graduate levy in the context of the overall NI contributions. Figure 1 shows the increase in NI revenue to the government over time. Added is the amount likely to be top-sliced for university fees if a graduate levy was implemented.
Figure 2 puts a graduate levy into the context of all tax revenue in 2022/23. It shows that investment in our universities would not need to break the bank. Indeed, it is surely necessary to help drive economic growth.
It is worth noting here that between April and November 2022, the government implemented a health and social care levy, which increased National Insurance rates by 1.25%, going directly to supporting NHS services. The OBR estimated that this levy would raise around £12.4 billion a year for health and social care over the three years 2022/23 to 2024/25. Not too far from the projected graduate levy proposed here.
TEFS has calculated that a levy of somewhere between 1.0 and 2 % would be needed. However, it’s a complex calculation with many scenarios to consider. The just released IFS – NESTA calculator for 2029/30 concurs with TEFS that a rise of NIC by between 1.0 and 1.5% could raise at least £13 billion assuming all other parameters remain the same. This is a crude prediction dependent upon variations in many other parameters. Two main decisions would have to be made to determine when the levy is paid. Firstly, setting the income threshold and/or secondly, deciding what constitutes a graduate job in the first place.
Setting pay thresholds or graduate jobs.
Having a degree generally leads to higher pay for most graduates. Therefore, it would be wise to set the threshold for the graduate at a level commensurate with this. While administering the levy might be a relatively simple bolt-on to NI, setting thresholds for who pays would be more complex. The extent of the levy would naturally be determined by how many graduates pay and what is the threshold level.
It might be assumed that defining a graduate is based on obtaining a degree after three or four years of study. There are two routes to take.
Firstly, apply the levy to graduate jobs. There is a well-established and long list of designated ‘graduate jobs’ that could be considered. Many will lead to higher pay in a graduate’s career. There is a long-established ‘Standard Occupational Classification’ (SOC) set by the Office for National Statistics (ONS) and this could be a good guide. However, it would miss many graduates in well-paid jobs or self-employed. There are many graduate consultants for example.
Using OECD data, released in 2020, Universities UK observed that,
“At the end of 2020, 43% of the UK working age population (aged 16–64) had a degree or equivalent”.
However, this proportion is increasing and will continue to do so. The share of young adults in the UK with tertiary education attainment is increasing. In 2021, 57% of 25 to 34-year-olds had a tertiary degree compared to only 29% in 2000.
This simple fact is likely to boost revenue from the graduate levy over the years to come.
Secondly, set a threshold salary level above which the levy is paid. However many graduates often start on lower pay levels and different professions yield different salaries (Institute of Student Employers . Latest ISE Student Recruitment Survey 2023 ). Figure 3 shows the long-standing pay gap between graduates and non-graduates. It is assumed that postgraduates are also graduates. The latest UK government graduate labour market statistics for England in 2022 show that the median nominal salary for graduates is £38,500 per year. There is a substantial premium of £11,500 above that of non-graduates. This tends to determine that the levy should kick in above £30,000 to £35,000 per year.
There but for the grace of God go I.
We are at a pivotal point in how our society will develop. The current direction of travel is towards privatisation and demolition of the welfare state. The idea of paying NI to be passed directly onto older non-working pensioners is under attack. Yet we should not forget that the longstanding social contact means the self-same pensioners contributed in their working lives to pensions for people now long gone. Welfare and the NHS are also there as a safety net for those who suffer misfortune and we pay to maintain the net that ‘but for the grace of God’ we hope not to need. Similarly, those earning more through degree-level education might consider their luck and leave the ladder intact and fully serviced for their children and others to use over time. The stark dichotomy between a privatised society and a social contract society is looming fast with plans to scrap NI on the table.
However, the words of Nobel Prize winner Robert Zimmerman still ring true.
“You don’t need a weatherman to see which way the wind blows”.
The author, Mike Larkin, retired from Queen’s University Belfast after 37 years teaching Microbiology, Biochemistry and Genetics.