When you write an essay (or a pamphlet) you never really know what climate it will emerge into.
When David Willetts put together his latest essay for HEPI (aided by the University of Portsmouth’s Dean Machin), he must have known that a pre-Budget piece would come alongside speculation about the future of HE funding in England. But he surely can’t have foreseen one of his core recommendations – a lowering of the graduate repayment threshold – would already be touted as a done deal, with only the policy detail (£20k is “a bit low”, £23k was the Augar recommendation) to be filled in.
The former university minister neatly splits the difference at £21k – coincidentally the figure originally suggested in the Browne Review. His policy prescription as a whole represents a tinkering with the edges of a system he (along with HEPI’s Nick Hillman) designed and implemented – though there is some sense talked about preserving BTECs, broadening level 3 study away from our restrictive A-level specialisms.
Design thinking
We get some crowd-pleasing selections from the Willetts back catalogue too. He still seems to think that there is a tsunami of alumni donations waiting to be tapped (via a letter distributed with SLC correspondence, of course!), and the idea of universities holding their own graduate debt makes another appearance. The latter is not a sensible idea, though I admit to a perverse wonkish delight at the idea of a graduate debt derivatives market emerging. At least he’s stopped talking about MOOCs, I suppose.
The design of the existing system was not a straightforward operation. It appeared shortly after – and contradicted much of – the 2010 Browne Review. Browne called for uncapped fees but a cap on government contributions (top up fees, basically), maintenance grants for disadvantaged students alongside loans that are not means tested, a regular review to the payment threshold, and low interest rates. Of course, very little of this happened. The higher level fee limit was set at £9,000 because of the political undesirability of a five-figure sum – there were grants, but they didn’t last long. The repayment threshold did not rise with inflation, although Theresa May’s intervention restored that link momentarily. And interest rates are not low by any stretch of the imagination.
A broken model
What remains are the flaws and inequities. High-earning graduates pay off less than their lower earning cohort. Students from comfortable backgrounds will start their working life with lower (or, rarely, no) debts. The design and funding of English higher education has been based almost entirely around the aggregated preferences of school leavers and their parents. The design of the system, which includes a subsidy covering the value of loans that are not repaid, is politically toxic and has led to the conflation of graduate earnings with the “value” of a degree.
And, with RAB hovering at around 50 per cent, the system costs the taxpayer more than the pre-2012 direct funded model. As it was always going to. We’re not looking at funding cuts because higher education is too expensive, or because too many poor kids want to study creative arts. We’re looking at funding cuts because the funding model is broken.
The recent rise in National Insurance contributions coupled with loan repayments has introduced a marginal tax rate of around 50 per cent for moderately earning graduates. Lowering the repayment threshold would expand this tax band to those earning less than the median salary. It’s enough to make David Willetts quote Marx – which he does, in support of putting the full cost of study on the individual.
One of the postulated reasons for the culture wars attacks on the sector are that universities are machines for making people hate Tories. I don’t hold with it – I think the deep psychological scarring incurred that turned the current brace of northern Tories into instinctive contrarians plays a part – but it is thoughtful of Rishi Sunak to complete the job by taxing low earning recent graduates into oblivion.
But all this financial pain does not build or maintain a higher education sector fit for the future. Avowedly “selective” providers are growing faster than they can invest in capacity, valuable locally-focused providers in unfashionable areas are facing financial calamity. The government confusion of levelling up and status is played out in shuttered courses and academic job losses.
The history man
I’ve a lot of time for David Willetts’ writing. He is probably the only higher education minister we’ve ever had with such a deep interest in the history of the sector – the early parts of “A University Education” are genuinely superb and you should read them whatever your politics. There is a taste of this at the start of the HEPI pamphlet – like many current and former conservatives he is happy to think radical thoughts about the past except where his own actions are called into question.
It is long past time for a fundamental rethink. Auguar was not it, and this pamphlet isn’t it either.
The industry that has built up in the political centre of policy writing that either defends the Willetts-Hillman model or proposes minor tweaks that do not address the fundamental problems with the system has a chilling effect on the wider debate. The only exception is the continued existence of free education advocates – who are right in the long term but unlikely to change the political weather in the short term. There is a hole in the policy landscape that urgently needs to be filled.
What is odd is that the system as we have it was defined in opposition to two closely related alternatives – on the one hand the Browne model of top-up fees, and on the other the Ed Milliband approach: the graduate tax. As the Conservatives have systematically stolen most other Miliband policies in recent years is it time to give the graduate tax another look?
Down to brass tax
It is often argued that Willetts’ system is to all intents and purposes a graduate tax. Like a tax it takes a marginal proportion of take home pay above a threshold, and like a tax the more you earn the more you pay each month. However it is not a tax in that it is associated with a specific unit of spending hypothecated to the individual – the sum of fee and maintenance loans, plus a genuinely usurious (if variable) rate of interest. Once the principal is cleared, the tax is no longer levied.
It is, indeed, so much like a tax that the Browne review itself included an infamous page detailing why the proposed model was better than a deliberately unattractive straw man model of a graduate tax. Even then, the actual system as implemented struggles in comparison with both models – funding following students directly has led to a perverse incentive to over recruit (as we saw this year) rather than a rush to drive up the quality of the student experience. And the idea that there are no upfront costs to study is mythological when loans don’t even cover rent and the assumed “parental contribution” is around £3k a year for a nurse and a primary school teacher.
The principal argument against a graduate tax is that it is perpetual. This is odd as it is entirely possible to levy a conditional, time-constrained, tax – National Insurance, for instance, is only paid when you are in employment and until recently you were not required to pay it beyond state pension age. You only pay vehicle excise tax while you own a car. There is nothing to stop us charging a tax on all graduates for a given 30 year period – you could even start it five years after graduation.
Breaking the link
The “flaw” here is that we break the link between student fee and maintenance loans and graduate incomes. Though the link makes instinctual sense it is the facet of the current system that is most regressive – graduates that earn more pay less over a shorter period, graduates who earn a moderate amount pay more over a longer period.
A graduate tax would mean those who have benefited most from higher education pay more – our current system stops taking a fair share of these benefits earlier, putting more pressure on those who earn less. We also have the option of using tax credits or exemptions to support nurses, teachers, social workers and other low paid graduate public sector roles. Or we could pay them what they are worth – that works too.
It would also end the issue that sees graduates from a more advantaged background paying less back than their peers from less advantaged backgrounds working in the same role for the same pay. And it makes the idea of a series of strategic and future-focused decisions about the shape, place, and coverage of the sector possible again.
The other argument for the current system is that hypothecated taxes tend to disappear into general spending – offering the government of the day the chance to lower higher education spending. It would be a foolish government that did not want to invest in the future workforce and reap the wider cultural benefits of higher education – but we’ve had our fair share of foolish governments and I don’t see this changing quickly.
There’s not an infallible fix for this – it would be possible to prominently publish the income from this tax and for the sector to reasonably expect that it would return to them, and it would be possible to put something into primary legislation to require that this happens. But bad governments are going to govern badly, although this is as applicable to changes to the current funding model too. And indeed to the genesis of the current model.
And how do you ‘tax’ someone who moves abroad unless you introduce the American style of the reach of their system
The same way as SLC deals with graduates who move abroad. Haphazardly – but it is such a small proportion of graduates it isn’t a huge problem.
Agree that this is not so much of a problem now we have left the EU. A graduate tax (like any tax) couldn’t be levied on those outside the UK but in another EU state, therefore students from the EU (or even UK student moving to the EU) couldn’t be taxed for the HE study but a loan could be recovered (haphazardly). Now EU students cannot access the student finance system the scale of overseas recover is greatly reduced, also being outside of the EU allows for alternative recovery methods for those living outside of the UK if a graduate tax was to be implemented. Previous EU laws prevented a tax in one member state being turned into a ‘loan repayment’ for non-residents (massive oversimplification here).
That’s an interesting response and I am intrigued by it. Firstly, if the SLC is addressing this in a haphazard manner then I would suggest that is grossly unfair to UK based graduates who have no alternative to being caught within PAYE. That should be a topic in itself. However, I am particularly interested in the suggestion that it is ‘such a small proportion’. I’m tempted to think that however small the numbers might be, many will be in the upper earnings bands. Some may well be doing bar work in Bali (although they will probably be wealthy middle class kids on a pre career gap yar) but at the opposite end will be the IT, finance and legal émigrés.
My overall position is that a ‘Graduate Tax’ is inherently unfair. To effectively penalise a graduate for the temerity of doing well and taking that into a successful career forcing them to repay far more than they borrowed is just as unfair as the punitive rates of interest that results in an ever growing (and unrepayable) debt for many. It would be seen as just about the clearest form of a tax on aspiration and achievement as there could be. Why single out the very people who have made the most of what was offered to be punished with eye watering rates of tax. Surely the fairest way would be to raise higher rates of tax from high earners across the board and which would get those same graduates anyway but in a more equitable way.
The elephant in the room is of course that there can be articles on this every month or so both here and in the Guardian but we have an administration with an 80 seat majority and little sign that they won’t be returned to power at the time of their choosing. Adding to the tax burden (if it were an opposition policy) would be unlikely to attract votes and you have to remember that most people in the UK are ‘aspirational’ in their outlook and anything that is seen as a drag on that is easily turned against those of a more progressive or egalitarian approach.
I would save the effort to keeping the current system as fair as possible with more sensible interest rates, a threshold that is linked to inflation just like the pension triple lock and a serious look at the return of some sort of grant system for living expenses.
“…effectively penalise a graduate for the temerity of doing well and taking that into a successful career forcing them to repay far more than they borrowed…”
They didn’t borrow anything. That’s the point. There is no debt (or temerity). There is just a publically funded higher education system from which people can choose to benefit. Those who benefit most contribute most.
The element that I still can’t quite get to grips with in relation to a graduate tax is “What is a graduate?” – or more specifically “What is the definition of graduate for the purposes of a graduate tax?” Is someone who doesn’t achieve the degree qualification they were aiming for a graduate subject to the tax. Let’s say they have done one year of study before deciding not to continue and received tuition and maintenance support. I suspect there are more people who do not complete their degrees than move move abroad after graduation.
This feels like something it would be possible to construct a rule on – a rate per year of study or somesuch. Again the breakdown of the link between individual payments and funding allocated to that individual should mean that among the myriad good and good-at-the-time reasons to stop studying the fear of debt would not feature.
There’s a variant of this idea that would resemble a “reverse pension”. All eighteen year olds would be given a lump sum that could be used for university, other training, business start up costs or similar. The money could be used in any combination of ways (or saved and used to pay the additional tax).
I’d be interested in seeing some suggestions for a rule that would pass a ‘fairness’ test so that students who do not get the benefit of having a degree (and possibly being is a worse position in terms of prospects than someone who hasn’t participated in higher education at all) paying back substantially more than they ‘used’. I still think keeping the loan model and repayment terms while significantly increasing fees and simultaneously heavily subsidising those on the lowest incomes through a means tested tuition grant is the fairest (though not popular) option.
Students who don’t get the (salary) benefit of a degree would pay less graduate tax than those who do. If you want to make this impact more pronounced you could use a taper or multiple rates. The whole idea of this plan is that people that earn more pay more – a major flaw compared to the current system where people who earn more pay less.
Well, my slightly off the cuff, over my cereals response has resulted in quite a debate. What’s still missing however are some serious proposals about how the graduate tax would work and how it would be structured to favour (or not) the various income bands of the graduate population.
There are hints in some of the responses that some ‘rules’ could be constructed and indeed that is the case and would of course be inevitable, but it would be nice to see what sort of percentage tax is likely and crucially when it would begin to be levied. What seems always to be forgotten or brushed under the carpet is the current threshold for starting income tax is around the 12k mark so simply applying an additional few percent at that level would bring virtually all current graduates into the net. I’m sure that’s not the intention. Be careful what you wish for here as that is effectively the impact of the recent NI rises. On the other hand, maybe making all graduate make some contribution, even if at the lowest end it is just a token additional tax, may be a reasonable idea but I am more interested in how the upper band is arrived at. Is it around the 9% that it is now or a lower amount? Is it to be set as at punishment level or perhaps a lower rate than now but just for longer?
Whatever we choose, I am still of the opinion that a graduate tax with no escape for x number of years is much closer to a tax on education than the current system and which for many is effectively free or of marginal cost for median wage earners.
Switching to a graduate tax would have distributional consequences for different groups of students. These are complex and not discussed in detail by David Kernohan. It is hard to say, therefore, whether the change would be more fair or less fair. There are other issues to take into consideration. A graduate tax bears no relationship to the cost of a course. Taxation is also not hypothecated for higher education. Would a tax far in excess of the cost of a course and which is not in fact used to fund higher education be ‘fair’? In some ways, it looks more like a penalty. You can fine or surcharge people for being educated above certain level, of course. This would be ameans to have fewer of them if they are considered such a bad thing.
To summarise your points:
– a graduate tax won’t work because hard reasons that I can’t tell you
– people will have to earn more and that is terrible – it’s like fining people for earning more (or “tax”, in other words)
– we’d have to hypothecate the tax for HE and that would also be bad
Thanks.
Why should those who worked hard at university, secured good graduate jobs in prosperous (higher income) areas in the South East and are now making enough to repay their student loans in the course of a decade or so be penalised because someone else took out a loan without considering if and how they could repay it?
“A graduate tax would mean those who have benefited most from higher education pay more” – err, no. You’ll see that high earners – whichever sector they may work in – generally didn’t use their university course that much, and generally didn’t apply any of the things they were taught there when it came to securing a job or progressing in their field. It comes down to the individual and their drive, motivation, willingness to get involved in extracurriculars, and so on. You’re assuming that there is a sense of community among higher earning and lower earning graduates of the same university – this doesn’t exist. You’re also implying a degree of causation between a university and “success” (by way of a high income) – this also does not exist.
So if “causation between a university and success by way of a high income” doesn’t exist, then why fund universities at all?
“You’ll see that high earners – whichever sector they may work in – generally didn’t use their university course that much, and generally didn’t apply any of the things they were taught there when it came to securing a job or progressing in their field.”
Will you? Where? Methinks you’ve been reading too many motivational LinkedIn posts.
What has always bothered me about the idea of a graduate tax is that … well, that it’s aimed at graduates; that someone pays a higher rate of tax just because they have been to university. If the justification is that those who earn more, pay more, then that starts to look like an argument for straight income tax. After all, not all rich people or high earners are graduates; not all graduates are high earners. It almost feels like an arbitrary reason for taxing people, once you remove the nominal fees/loan link. Higher education is just one public good of many that forms the societal context in which people can succeed, so why single it in particular out for hypothecation? I know why it can’t happen in practice – electoral acceptability. I can also see that it could lead to further disparagement of degrees that don’t lead to higher earnings, on the grounds that the state isn’t recouping its costs. But overall, and in answer to your (DK’s) previous comment, someone has to keep shouting PUBLIC GOOD, no matter in how barren a wilderness.
This gets to the nub of the matter. We can dance around the myths of ‘deserving vs undeserving rich / poor’ as much as we like, but there is no truly ‘fair’ way to tax. Who can assess where ability / drive / good decision making really come from, how they are ‘acquired’, and whether that can be ascribed to the individual rather than their circumstances / parents / social background / contacts / luck etc? It’s a pointless pub argument and little more.
What we can know is that education is a public good that benefits all and that, for the country as a whole, more of it is generally better than less of it. Some individuals might make the ‘most’ of it (in the eyes of some), and some won’t. As a result, the fairest way to tax is on wealth and ability to pay, as it has always been. It is then up to the government of the day to decide who can afford to pay tax, and how much, and on what it should be spent, and to make the case.
I agree that a change of this nature is electorally challenging, but discussions of general wealth taxes are already more mainstream now than they were even a few years ago, and there have been national conversations over the last year (and even the last week or two) about the low-wage economy and automation and renationalisation that were previously taboo. Maybe it’s not as challenging as we think?
!00% agree Sarah. I suppose if someone becomes ill we could loan them the money for their medical treatment and then they could pay it back at a high interest rate over the next 30 years. Makes sense as they will be able to earn more money now they have their health back…. or would an NHS be a better answer?
Thanks for this thoughtful piece David. My own thoughts are as follows:
1. I have supported an income contingent graduate contribution to tuition for many years because it recognises the public and private benefits of HE, avoids (when the model works) those who don’t go to university subsidising those who do and forces providers to invest in the student experience.
2. Following the Diamond Report (commissioned once it was clear that the partial tuition fee grant in Wales was unsustainable), Wales has managed to support full and part time study with maintenance grants and loans for undergraduates and postgraduates. UG FT fees have remained at £9k (cf £9250 in England). The RAB charge is much lower in Wales.
3. I was not unhappy with the Browne recommendation of no upper cap on fees since the market would then find its own level rather than all providers (acting rationally) defaulting to the cap. This would help maintain the global pre-eminence of our leading universities. However, it must be accompanied by a legal requirement that, prior to the point of entry, admission must be needs blind.
4. A graduate tax is a very bad idea since it is not hypothecated and lasts for ever.
5. The current system puts the taxpayer in the position of default funder by proxy of institutions who are incapable of producing a significant proportion of their graduates earning enough to repay the loan. As you point out the taxpayer is now on the hook for much more (about 50% more?) than the old Hefce T grant of about £8m from memory, even though fees have been frozen.
6. That default rewarding of “failure” by the taxpayer would be better deployed by investing in the skills base in a remodelled system.
7. In a remodelled system there may be a case for separating regulation and funding (currently both performed by OfS and HEFCW) to avoid the marking of own homework and enabling a new funding body to focus on investing in WP, fair access and inclusion, as well as purchasing in the public interest eg for high cost subjects important to the economy or for subjects such as modern foreign languages where access is now largely controlled by independent and selective schools. This body could then be accountable to regulators for its actions in a similar way to providers.
8. The reduction of the RAB charge over time has implications which need to be carefully planned for recruiting institutions often co-located with FEIs which are able to offer TEF Gold HE at levels 4 and 5 for half the cost of the £9250 fee. I would envisage the development of group structure providers which effectively become pretty full service community universities and skills and employability engines. Some examples already exist in SE and SW Wales.
9. The current system is now unsustainable and requires reform. Augar is not the answer; there should be another specific funding review of the quality of Diamond. Ideally both main parties should commit to the outcome in England. If that is not possible an opportunity exists (because of the nugatory but increasing cost of the RAB charge to the the public purse) for the opposition to craft a scheme which protects the public interest, drives efficiency and effectiveness and enables the right student to be on the right course.
End of rant!
David K could be right when he asks: “So if “causation between a university and success by way of a high income” doesn’t exist, then why fund universities at all?
The people who benefit most from Universities are the people employed by Universities. The “Funding Farce” is a way of transferring money from tax payers into the pockets of academics.
I can see the need to improve the skills of the young through teaching skills at all ages and that this has a role to play in wealth creation. The fact that from the age of 18, some of this is done in institutions we call Universities, is largely historic.
When Britain was the richest country in the world, from around 1820 to 1920, we had very few undergraduates.
I am not sure if we will ever be able to “prove” having Universities delivers a “better” society, but I do agree that there needs to be a better way of nurturing talent and supporting people to help deliver a better world.
I agree with your final clause! – but ‘money from tax payers into the pockets of academics’ – I don’t think you know very much about academic pay….
Great to see the debate happening!
I start from the the belief that higher education is both a private good and a public good.
To the extent that it is a private good, it seems reasonable that graduates should contribute to the cost, subject to ability to pay.
But to the extent that it is a public good, surely everyone, not just graduates, should contribute (again subject to ability to pay)? If, as I certainly believe, there is value to us as a society in having a university educated population that does things like invent a Covid vaccine, challenge political orthodoxies, start new green businesses, understand how the universe works or create new art – surely that value is experienced by everyone and should be paid for by the rich, not just by rich graduates?
The current system differs from a hypothecated graduate tax in two important respects: the existence of a cap that is intended to mirror the costs involved, and the levying of an interest rate. The first of those seems reasonable to me as as it reflects the above distinction between private and public good. But the second – the punitive interest rate that allows the richest who pay quickly to contribute less – is indefensible.
My prescription for replacing the interest rate was set out here: https://wonkhe.com/blogs/we-need-to-change-the-language-of-student-loans/
@Paul Woodgates There are two main problems with your argument. First problem is that lots of people do jobs that confer wider benefits to society. HGV drivers, for example – as has been demonstrated very clearly in recent weeks. Taxing lower paid workers without degrees to subsidise higher paid workers with degrees is the issue with the “everyone should pay” stance. Second problem is that reducing the interest rate would in fact benefit the highest paid graduates most – as evidenced earlier in this thread.
One question I have about a graduate taxation approach is how it might work across multiple degrees or qualifications. Let’s say you do a bachelors, masters and PhD; do you get taxed more than someone who just did a Bachelors? What about someone who did an integrated masters? Or someone who has done several bachelors degrees?
If you did increase the taxation rate per degree, does it deter people from taking further qualifications (there are already potential issues about whether a PhD is a good return on the investment), or should the taxation solution only work for undergraduate and integrated masters qualifications?