Tuition fees and graduate tax: What's the difference?

Labour's shadow chancellor Alan Johnson has said he now backs bringing in a graduate tax to replace university tuition fees in England. But what is the difference between the two systems?

What is graduate tax?

Under this system, graduates would start paying the costs of their university tuition when they start earning, in the form of extra 3p or so on income tax. A "pure" graduate tax would mean it is levied for the whole of one's working life after graduation. This would mean that the more you are paid the more you pay back. There is much discussion about whether - and at what point in their career, or at what total repayment figure - a graduate should stop paying, and whether there should be a minimum salary before the graduate tax is triggered.

And how do tuition fees work?

Under the current system, tuition fees in England are capped at £3,290 a year. They come in the form of a loan to students, although the money goes straight to the university. Graduates have to start paying these back at a subsidised interest rate of 1.5% after they earn £15,000 or more a year. This does not cover the actual cost of university tuition, which for an average student is about £7,000 a year.

What are the arguments for a graduate tax?

Supporters say graduate tax is progressive, arguing that those who have benefited most from a university education would pay most. They also say this would remove the spectre of graduating with large debts, which could deter those from poorer backgrounds from going into higher education.

And the arguments against?

Opponents argue that it would be unfair, as those graduates who are most successful would be charged far more than the cost of their education, subsidising others. The Russell Group of top universities claims that high earners could end up paying £16,000 a year in extra tax. High earners might also be more likely to work abroad to avoid paying the graduate tax, causing a "brain drain", it is argued.

What are the government's plans?

The government wants to allow universities to charge fees of up to £9,000 per year. But those wanting to charge more than £6,000 would have to undertake measures, such as offering bursaries, summer schools and outreach programmes, to encourage students from poorer backgrounds to apply. The salary threshold at which graduates have to start paying their loans back would be raised from £15,000 to £21,000. Graduates would pay back 9% of their income each month above that threshold. The interest rate will rise from 0% for incomes of £21,000 to 3% plus inflation (RPI) for incomes above £41,000. If the debt were not cleared 30 years after graduation, it would be wiped out.

Will students be able to pay back loans early?

Those who can afford it will be able to pay their own university fees up front, avoiding accruing any debt at all. But the government is consulting on penalties for early payments of loans, arguing students should not be able to "buy themselves out" of paying interest.

Where does the money go?

Under the graduate tax scheme, the money would go back to the university sector in some way, presumably via the Treasury, to be distributed from there - but not necessarily straight back to the institution attended. There would, though, probably be a delay before the flow of cash to the government increased. The increased tuition charges idea would mean the student pays a set fee, with the money going to their specific university. Opponents say this will mean a market in higher education, with the best universities charging more - within the guidelines set down. But supporters say this is no bad thing, as standards rise with increased competition.

How different will student payments be under the two systems?

It is impossible to say until the exact nature of the graduate tax proposals are outlined. It all depends on the rate of payment, the income threshold at which the tax kicks in and the time and total payment limits set. Of course, if students are only to pay graduate tax until the actual cost of their university tuition is met, then the differences between the schemes are likely to be minor. Some commentators argue that, as both systems mean paying money retrospectively through the tax system, they are both, in reality, graduate taxes.

What is Labour's stance?

Shadow chancellor Alan Johnson has openly disagreed recently with leader Ed Miliband's support for a graduate tax. But he has now changed his mind, arguing that the fees system he steered through parliament in 2004 is being "distorted" by the coalition, adding that a graduate tax may provide a "fairer way of sharing costs between individuals and government". There is no mention of what form a graduate tax may take, or how different it might be to the proposed new tuition fees system. The idea was being discussed as long ago as 2003, when the then Labour government instead opted to increase fees to the current level.

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