Is it time to slap VAT on tuition fees?

As the debate on private schools fees and VAT continues, Jim Dickinson considers the bargain that the richest are increasingly getting out of higher education

Jim is an Associate Editor at Wonkhe

When university fees and funding are discussed, we inevitably tend to talk about the poorest – the poorest students, the poorest families, and sometimes those who don’t earn a significant premium and so become the poorest graduates.

New proposals from the Sutton Trust, for example, note that since the abolition of maintenance grants in England, students from lower income backgrounds have been leaving university with the highest levels of debt.

New (or at least tweaked) analysis by London Economics for the Sutton Trust estimates that poorer students could graduate with £60,100 of debt – 38 per cent higher than the £43,600 for those from wealthier families, with the gap largely driven by the need to take out maintenance loans.

It says essential costs are higher than the maximum available loan for almost 6 in 10 students, 1 in 5 students’ housing costs alone are higher than the available loan, a third of students from working class families have skipped meals to save on food costs, and almost a quarter of students report they have missed a course deadline because of their job.

Given students from disadvantaged backgrounds are also the most debt averse, it says there’s a risk that the current system will increasingly deter poorer students from attending university, or at least restrict their options to those closer to home.

And the ongoing freeze to the parental income thresholds that are used to determine the income levels at which parents are expected to contribute to their child’s living costs at university means that around 30,000 students starting university this year have been “locked out” from taking out the maximum level of support when compared to the year before.

As a result its package of proposals involves the re-introduction of maintenance grants for poorer students in England, an increase in the overall amount of maintenance available, and a widening of eligibility for support – all via changes to repayment terms to make the system more progressive, with lower overall repayments for lower income graduates.

As I say, the focus for the Sutton Trust here is on the poorest families, the poorest students and the poorest graduates. But what everyone talks less about is the richest graduates, and the astonishing bargain that well-off families, well-off students and well-off graduates are getting these days.

That Augared badly

When the Westminster government responded to Phillip Augar’s Post-18 review of education and funding back in 2022, it said there was a need a “fairer and more sustainable system for students, institutions and the taxpayer”, and a system that will “maintain our world-class universities not just for today, but for the decades to come”.

Let’s park how that second ambition is turning out, and look at the first.

The costs of the system to taxpayers were described as “not sustainable” – and firmly in sight was the proportion of student loan outlay expected not to be repaid when future repayments are valued in present terms – the so-called Resource Accounting and Budgeting (RAB) charge.

The combination of having an income-contingent graduate repayment threshold and a write-off period of 30 years mean that it thought 75 percent of borrowers who took out a loan for a full-time course starting in AY2020/21 were not expected to repay their loan in full.

As a result, the government said that the RAB charge for student loans issued that year was expected to be 44 per cent – meaning that borrowers would, on average, repay 56 pence in every pound over the lifetime of these loans.

So it resolved to do three things – freeze (and for new borrowers, lower) the repayment threshold, increase the term from 30 to 40 years, and to deliver on a manifesto commitment, take interest on loans down to inflation – in theory abolishing interest in real terms.

That, it said, would get the RAB charge down to 31 per cent for 2021 starters – and down as low as 19p in the pound for financial year 2026/27.

I’ve talked on the site before about how badly the interest rate wheeze is going given the differences between RPI last September and the current Bank of England base rate. But something else has now emerged.

Under the Acland-Hood

In her letter to the Public Accounts Committee following the recent hearing over franchising, the Department for Education’s Permanent Secretary Susan Acland-Hood follows up on the repayment of student loans.

In it, she says that undergraduate students who started their studies in academic year 2022/23 (on Plan 2 terms) are forecast to begin repayment with an average debt of £45,600 – equivalent to £36,900 in financial year 2022-23 prices. That’s debt that is composed of the amount borrowed and interest accumulated during study.

She says that the average Plan 2 undergraduate borrower is expected to repay a total of £24,700 in repayments (in financial year 2022-23 prices). A 33p in the pound subsidy, in other words.

Meanwhile undergraduate students starting their studies in academic year 2023/24 (on the new Plan 5 terms) are forecast to begin repayment with an average debt of £42,900, equivalent to £33,800 in financial year 2022-23 prices – and on average are expected to repay a total of £24,300 in repayments (in financial year 2022-23 prices). A 28p in the pound subsidy.

The big difference of course is in who repays what. Plan 2 graduates in the highest 10 per cent of earners enter repayment with a debt of £38,700 (in 22-23 prices) but repay on average £50,000 (in 22-23 prices) over their lifetime.

But for Plan 5, they graduate with a debt of £35,200 (in 22-23 prices) and repay an amount very close to this – £36,300 (in 22/23 prices – it’s very slightly higher because of RPI calculation lag).

In other words, because 61 per cent of Plan 5 borrowers are expected to repay their loans in full, compared with 27 per cent of Plan 2 borrowers (because of a longer repayment period and lower repayment thresholds) the average cost to students over their lifetime is almost identical – it’s just that richer graduates in their late 40s and 50s are let off, traded against plunging recent poorer graduates in their 20s into early career poverty.

Whether you regard that as “fairer” for students is very much a political choice – and one that Labour has signalled that it will look at. But it also got me thinking about even richer folk.

More than you pay for

The recent debate about VAT on private school fees matters partly because one of the purposes of a private education is to get your kids into an elite university. Once there, for the same sticker price, your kids are likely to benefit both from more being spent on your education per head (given the higher level of research cash and donations/endowments), and better graduate prospects derived principally (but not exclusively) from a signalling effect.

Private education has been going up in price. According to Schoolfeeschecker, the average cost per child is now £20,480 a year for day pupils. And so on the assumption that it continues to be the case that privately educated pupils are still significantly more likely to enter high tariff universities, while school is getting more expensive, higher education for those that end up in one of the upper salary deciles has become dramatically cheaper.

But that hides another issue. If it’s the case that privately educated kids are getting £20,480 a year spent on their tuition fees, it’s a fair bet that those are kids that are also much more likely to be paying their £9,250 upfront, and avoiding the loans scheme altogether. And given we know that £9k fees are now only “worth” £6k in real terms, that also means that families that pay upfront are getting an incredible bargain in comparison to 2012.

Figures on the percentage of students that pay upfront are surprisingly difficult to get hold of – the Intergenerational Foundation has a go back in 2019 and found that 10 per cent of the 1 million+ UK-domiciled full-time and part-time students studying first degrees at English universities were paying their fees up front.

Six Russell Group institutions were found to have self-funding levels for full-time first degrees at more than twice the national average of around 7.5 per cent – King’s College London (20%), Cambridge (16%), Oxford (16%), University College London (14.5%), Imperial (14%) and LSE (14%).

That was all clouded a bit by a couple of factors. It was “only” 7.53 per cent when looking at full-time students – we can imagine all sorts of scenarios where PT fees were sensibly paid upfront by employers, or those not straightforwardly resembling “the rich”.

And within that 7.53 per cent there were almost certainly a decent proportion of Muslim students who have been waiting for the best part of 14 years for the government to deliver Sharia-compliant student finance.

But nevertheless, a decent chunk of students will have been avoiding debt and “progressive” interest by paying upfront – and it’s a fair bet that as the real-terms cost has been coming down, that proportion will have been growing.

If you view the student finance scheme as a loan, this is fine – why should the state compel people to take out a loan? If you view it is a tax, this is legalised tax avoidance – at least while we had interest rates designed to cause those that benefited the most to pay more. And of course, despite attempts to argue that it’s definitely a loan or a definitely a tax, it’s both.

Right. What’s next?

This should present an incoming Labour government with an acute dilemma. It’s been floated – including in this latest Sutton Trust scheme – that to pay for some modest grants, “real” interest rates could come back onto the table.

These are paper and predictive calculations – but it is the case that technically, once you kill off (either partially or in full) that interest rate bung, you in theory free up resource to spend on grants, tuition funding or bigger tuition or maintenance loans, as long as you’re prepared to loan more money out.

The problem is in the mix. If Labour shies away from increasing the tuition fee substantially, but reverts to making the long-run cost more expensive for richer graduates by jacking interest rates back up in the name of progressivity, that will almost certainly cause more and more better off families to pay fees upfront – exacerbating the “bargain of the century”/tax avoidance issue I suggest above.

And then you’re left with a starker choice. It is clear that the Conservative end of the 2010 coalition rather regrets the progressivity that it built into the loan scheme at the behest of its Lib Dem partners – partly because it’s less interested in being progressive, and partly because it never got any credit for it anyway. Hence its move in the hybrid towards the loan being a loan.

But that by definition means that if you’re more interested in being progressive, and indeed more interested in getting credit for being progressive, you have to move the arrangements much closer to those that resemble a tax. And unless you take steps to ensure that growing volumes of the rich aren’t able to avoid that tax by paying upfront or repaying early, you’ll fail.

And that’s why, I suspect, that what some view as a “dead” debate about graduate tax will be back on the table much sooner than many think.

Maybe that’s all a bit too complex for the bandwidth that will be available to Labour in a first term, just as removing charitable status from private schools has been abandoned in favour slapping VAT on their fees. But surely it does also mean – at least for home domiciled families that pay their university fees upfront – that Labour should apply that VAT fix on university tuition fees too. That would raise two thirds of a billion that both universities and students could really do with right now.

3 responses to “Is it time to slap VAT on tuition fees?

  1. VAT (very annoying tax) could be ‘slapped on tuition fees’ but there would be very little fiscal benefit to doing so. Just as well given the precarious nature of some HEIs financial status. The reason is simply because Universities are unable to recover more than a tiny proportion of VAT incurred on expenditure due to the fact they do not incur VAT on their main teaching and research income streams (and closely related activities).

  2. Total tuition fees at English universities and other OfS registered providers forecast to be £24.5 billion in 2023-4 according to OfS so there has be a risk that HM Treasury will move on from VAT on private school fees to other education fees. In same report, OfS count up £22 bil in operating expenses (£17 bil) and capital spending (£5 bil) so there would be input tax to offset new output tax but not all spending attracts VAT so there’d be a return for govt. The with widening VAT on education include the fact revenues aren’t hypothecated, the impact higher prices would have on international student recruitment, the opening up of new opportunities for the tax planning industry and discouraging spending on education.

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