Who benefits? Who pays? Sharing the cost of degrees amongst those who benefit

Most of our universities are now running an annual deficit, with net liquidity for some measured in days and weeks. They are breaking into the student ‘piggy bank’ to cover costs. Maintaining ancient grand buildings alongside modern constructions, with loans still to be paid, is a luxury designed to create a façade of timeless strength and stability. The cold reality underneath is that most are shedding staff at a scale not seen for decades. Asking students to repay all fees, and then more, is not the solution, even for one year in 2025/6. Sharing costs amongst those who benefit is a ‘radical’ solution proposed here. A National Insurance levy on graduates and their employers above a pay threshold, combined with strategic investment from general taxation, would be more sustainable and fairer. But can we agree on who are the beneficiaries?  Change is predicated upon answering this question before resetting the system for all. There will be difficult trade-offs, but universities must rise to the challenge.

Who benefits?

The answer to this question should sit at the foundation of any funding system for university degrees. It is also a simple question that requires a simple answer. Even ChatGPT has sensible answers (see Footnote) that elude those more advantaged families with a vested interest in the current system. They simply don’t want to pay more to benefit those of lesser means who should be kept in their place outside of the ‘elite’.

In the post-war expansion of our universities, it was thought that wider society benefits from graduates. There were no fees and maintenance grants were provided for those of lesser means with the burden falling on the general taxpayer.  But the number of students was capped at a low level and further expansion required another funding model. The result was that wider access since 2012 saw this philosophy turned on its head.

The current thinking is that students are the only ones benefiting from gaining a university degree. They are viewed as paying ‘customers’ of the ‘providers’. Government loans must be repaid by most graduates over their working lives. They bear all the costs in a false ‘marketplace’. But this has not worked well and led us to a fixed price and a mismatched ‘supply and demand’ imbalance. Strategic thinking, which considers wider society and employers, was sacrificed at the altar of student customer demand. Yet wider society still foots the bill for unpaid loans and universities must be funded upfront anyway.

The expansion since 2012 has been led by ‘customer’ demand fuelled by ‘provider’ marketing and advertising. However, wider society and graduate employers also benefit from degree-level education. Many employers can only employ graduates with specific key knowledge and skills and expect a high level of attainment. Furthermore, a new balanced system must include strategic investment by the government to provide for the ‘skills agenda’ to drive greater economic growth.  A major trade-off would be including graduate employers in the development of courses and the decision-making process. This might alarm universities demanding full autonomy but it is necessary if they are to share some of the costs.

Government dilemmas.

The recent Institute for Fiscal Studies (IfS) ‘Annual report on education spending in England: 2024–25’ (.pdf) detailed the government’s stark dilemmas to be faced in the coming years.  They observed  that,

“So far, the new government has broadly continued the previous government’s policies on higher education funding”.

This cannot continue for long, as pressure mounts and radical change is needed. They are right to focus on early years provision, but more must follow. Higher education may be taking a back seat for now. However, continually increasing student costs is no answer.  Indeed, increasing the fees for 2025/26 seems to be an emergency stopgap to keep the wolves from the door of our universities, and only covers added National Insurance costs. Further rises are not promised. The delayed Phase 2 of the spending review in June provides an opportunity for them to do what they say,

“By totally rewiring how the government spends money we will be able to deliver our Plan for Change and focus on what matters for working people”.

The IfS report concludes with,

“Higher education faces big questions, particularly around the growing reliance on international students and how sustainable this will be in the long run. Maintaining the real-terms value of tuition fees and student support is important, but the government needs to set out how it intends to balance the needs of students, taxpayers and universities”.

Plenty of advice around.

The government has been bombarded with many funding suggestions over the past year. They range from variations in graduate repayment arrangements to employers bearing all the costs. The Higher Education Policy Institute (HEPI) offered a range of ideas last April and asked, ‘How should undergraduate degrees be funded? A collection of essays’ (pdf). Financial modelling by London Economics followed. These were summarised by TEFS with another offer, ‘Funding students and Universities: a graduate National Insurance Levy is progressive and fairer’, and calls for a fairer and more progressive system.  TEFS has proposed this several times over the last two years.  Something along similar lines emerged last September from economist Tim Leunig, a former Chief Analyst at the Department for Education.  In ‘Undergraduate fees revisited’ (pdf) he offered a solution promising that,

“Highest earners would pay the most, as is appropriate in a social insurance scheme”.

It’s an old idea remerging from the mists of the previous Labour administration (see ‘An old idea in new clothes’ below). However, its complexity is likely to be its downfall and TEFS earlier suggested a simpler solution that would achieve the same goals, but at lower administrative cost, ringfenced funding for universities, and guarded against inflation.

A shared cost approach: National Insurance Graduate Levy.

If it is accepted that the main stakeholders are graduates, their employers and wider society in general, it follows 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 the jurisdiction in the UK they come from. This could also be merged with a reformed Apprenticeship Pay Levy currently in place to fund trainees for larger employers.

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, ‘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 approach 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 always matched to student numbers. Those students would also be supported to enable them to fully partake in degree programmes on an equal basis. This is crucial to ensure equal time for students to study on a level ‘playing surface’.

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 (see TEFS 10th January 2025 ‘Student employment and finances: running out of time’)

An old idea in new clothes.

This is not a new idea. The notion of using National Insurance contributions to fund student fees has been around for a long time, sitting alongside the idea of a graduate tax. These proposals were well-known to the Blair government. 

In their collection of articles in the book ‘Financing Higher Education: answers from the UK’ in 2005, leading economists Nicholas Barr and Iain Crawford made a compelling case for looking at National Insurance as a vehicle to repay loans.  Going back to 1989 (taken from Nicholas Barr 1989 ‘Student loans: The next steps’, Aberdeen University Press) they explored in detail the various options under consideration. The keystone idea that the repayment of loans must be income contingent was not in doubt.  They concluded that loans should be repaid via National Insurance because it was the easiest to administer and could be easily deployed.  There is an assumption that this would be a contribution and grants would remain. Also, it would be unfair to ask graduates to pay more than the loan in time and there would be a repayment cap. They rightly observed that,

“The use of the National Insurance mechanism lends itself easily to an employer contribution.”

In making comparisons to contributions to the state pension, they saw this as a pension in reverse.  The social contract, arising from the Welfare and Insurance Legislation between 1946 and 1948, has been embedded in our society for a long time. It is predicated upon payments by employees and employers now going into a fund that supports those who have already retired and those needing benefit support. As ‘insurance’ it does what it says on the tin. The promise is that future employers and workers will continue to pay into the fund, and so the cycle continues. However, a Graduate Levy would act like the state pension in reverse.

“The student needs access to his/her future earnings; private capital markets are not able for technical reasons to supply such loans; thus, an arrangement which uses the National Insurance mechanism is efficient. Student loans are just an upfront pension.”

With inflation creating havoc in our universities as the fee cap continues to be frozen, this mechanism would resolve the situation quickly. Fees could rise with inflation and be matched by the National Insurance Levy that tracks wage inflation.

There is a solution, and it could be applied quickly with student loans transferred to a new system that is progressive and inflation-proofed.

What is National Insurance?

National insurance (NI) 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 ‘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 a 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 to employers. 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 should only 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, involving employers and professional bodies, 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 5^th 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. Another simple option would be to apply the levy to all graduates regardless of where they studied for their degree.

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 considering 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 (% of GDP in red) 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 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 total levy of somewhere between 1.0 and 2.0 % would be needed. However, it’s a complex calculation with many scenarios to consider. The  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 for 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 of universities as they begin to look elsewhere for funding (see TEFS 26 September 2021 ‘Privatisation storm looms for universities’).

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 over 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 was looming last year with Conservative plans to scrap NI on the table. In 2025, we still need to remain vigilant.

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.

Footnote:

ChatGTP answers to questions on beneficiaries of degrees and a graduate tax.

Who benefits from a university degree in the UK?

A university degree in the UK benefits various individuals and groups, including:

Conclusion

Whether the UK should adopt a graduate tax depends on how society balances fairness, equity, and economic practicality. While it could reduce student debt and improve access to higher education, there are concerns about its long-term impact on both graduates and universities.