Education & Family

Graduate tax: Winners, losers and a linguistic tangle

Students at graduation ceremony, Birmingham University
Image caption The most selective universities would prefer uncapped fees to a graduate tax

Few subjects are as shrouded in obfuscatory language as the student finance debate.

At present, in England, we talk about tuition "fees". Yet they are not fees in the usual sense of the word.

A "fee" is normally a charge you pay at the time of receiving a service.

In the case of tuition fees, students do not actually pay anything as they go through university.

Instead they are given a government loan that matches the fee level.

It is like going to the cinema and, on the way in, having someone give you the entrance fee and agreeing to let you repay it in increments over 25 years, without any real rate of interest, providing you can afford to do so.

That is a good deal for the cinema-goer but not for the person making the loan.

In the case of university fees, it is the taxpayer who makes the loan and it is proving increasingly expensive.

Zero interest

Indeed, there is one key fact about the current system of funding universities that explains why the Business Secretary, Vince Cable, has chosen to float the alternative of a graduate tax.

That astonishing fact is that every £1 of loan given to students to cover the cost of tuition fees costs the taxpayer 23 pence.

Image caption Raising the interest on student loans would hit graduates hard

That is equivalent, according to the Institute for Fiscal Studies (IFS), to a subsidy of £4,800 for the average graduate from a three-year degree.

That cost arises mainly because the loans are available at a zero real interest rate (graduates pay interest rates equal to inflation) and because some loans will never be repaid.

Until the financial crisis concentrated minds on this uncomfortable fact, the most likely policy option was a lifting of the fees cap allowing universities to charge £5,000 a year.

But while that would bring in more money for universities it would also mean a higher subsidy from the Treasury, rising to £6,900 per graduate according to the IFS.

Nifty footwork

For Vince Cable's Liberal Democrats, there is another problem. At the general election, they pledged to abolish tuition fees.

So, with the nifty footwork of a ballroom dancer, Mr Cable has introduced another, equally obfuscatory, phrase: the "variable graduate contribution tied to earnings".

From a political perspective, the good thing about this phrase is that it dances right around the dreaded word "tax".

It would not, of course, do away with the system of up-front loans for students but, with high-earning graduates paying considerably more than the cost of their fees, the subsidy required from the taxpayer would be far less.

There are, of course, many practical problems with what, for simplicity's sake, I shall call the graduate tax, including the issue of fairness, with some graduates effectively subsidising others.

There would also be a delay before the flow of cash to the Treasury increased.

Treasury coffers

But, while these issues have been widely discussed, less has been said about the implications for university funding.

For universities, the big advantage of the current fees system is that the money goes directly into their budgets. A graduate tax would go into Treasury coffers.

It might subsequently be passed onto universities, but there is no guarantee.

Moreover, governments tend to attach conditions to the money they give to educational institutions.

That is why the Russell Group, representing the most selective universities, opposes the graduate tax.

It prefers a fees system with no cap on fees. As market-leaders, top universities could charge far more than now and still have plenty of "customers".

The extra fee income could fund generous bursaries for poorer students, as happens in the US.

Other university groups, like Million+, are more wary of a market in fees as their students are more debt averse.

For these universities a graduate tax is the lesser of the evils as it would avoid a market in fees and might even mean graduates from other universities would, in effect, be subsidising their students.


There is another option, which Mr Cable avoided mentioning.

This involves keeping the current system but charging an above-inflation rate of interest on fee loans.

The IFS calculates that a real terms interest rate of about 3.45% would reduce the subsidy to zero.

Raising the interest rate above this would deliver a profit to government.

Of course, this would have a major impact on graduates, particularly those who take longer to pay off their loans, and would be a hard-sell politically.

Meanwhile, Mr Cable dropped another bombshell this week when he said some universities might be allowed to go bust.

No universities minister has been that blunt before.

At one end of the spectrum, some universities are fighting for the financial lives. At the other, they are struggling to remain competitive with the best universities in the world.

So, while the fees review is important to students, it is also critical to universities.

Mike Baker is a freelance journalist and broadcaster specialising in education.

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