Fairer loan system or graduate tax ‘could save government money’

A “stepped repayment system” where higher-earning graduates pay more or a graduate tax could save the government money while removing “regressive features” of its reforms, according to a report commissioned by the University of the Arts London to drive debate on funding change.

The report, by Gavan Conlon and Maike Halterbeck of London Economics, says both options would allow for the reintroduction of maintenance grants, while highlighting in detail how the government’s changes to student finance in the Augar review – lowering repayment thresholds and slowing their uprating, plus scrapping “real” interest rates – benefit the highest earners.

It comes after Universities UK launched a “national conversation” to seek solutions on the underfunding of teaching and research.

Speaking at a Higher Education Policy Institute (Hepi) event to launch the London Economics report, James Purnell, the UAL vice-chancellor and a former Labour Cabinet minister, said of its findings on the regressive nature of the amended system: “For me, the case a change is needed is made.”

Dr Conlon told the Hepi event that the system was now a “Frankenstein’s monster”. It has been “amended and adjusted so many times we don’t know which way is up”, and the Augar response changes “probably couldn’t be any worse” in benefiting “the wrong type of people”, he argued.

“What we are saying is there are alternatives,” Dr Conlon also said. There were alternatives “within the current system” in the form of stepped repayments and “ways and means outside the current system” in the form of a graduate tax, he added.

The stepped repayment system outlined by London Economics involves real interest rates of up to 5 per cent post-graduation, with repayment rates of 3 per cent on earnings between £12,570 and £27,570; 6 per cent on earnings between £27,571 and £57,570, and 3 per cent on earnings of £57,571 or more.

This system would lower the RAB charge – the proportion of loan outlay written off and paid by the government – from 18 per cent to 17 per cent compared with the system as amended by the Augar response and lower the total Exchequer cost of the system from £4.7 billion a year to £4.5 billion a year.

While being “(essentially) fiscally neutral to the public purse”, the stepped system would mean “the adverse distributional effects of the DfE’s response to Augar are avoided,” says the report. It also outlines another potential stepped system where higher repayment rates would allow for the reintroduction of maintenance grants.

The graduate tax scenario modelled involves the “full replacement of current maintenance loans and fee loans with maintenance grants and fee grants, respectively”, plus “a graduate tax of 3 per cent payable on earnings between £12,570 and £50,270, and 5.5 per cent on earnings of £50,271 or more (with thresholds mirroring income taxes, and with no time limit, ie, payable until retirement)”.

The scenario would leave the RAB charge unchanged at 18 per cent compared with the Augar response reforms.

“Compared to the DfE’s response to Augar, this approach is again (essentially) fiscally neutral, while ensuring a fully progressive graduate contribution system,” says the report.

Lord Willetts, the Conservative former universities minister, argued that a graduate tax would be unfair in asking the highest-earning graduates to repay more than the cost of their education, would risk driving some students to US universities instead of choosing UK courses likely to lead to high earnings and higher tax payments, and would involve “ending the autonomy of universities” by making them more reliant on government funding.

He argued that the aim should be to “reform and recalibrate” the status quo. Labour should opt for an “open and public five-year review of how the system is working”, he added.

Mr Purnell said UAL aimed to lower finance barriers for students and thus wanted a “progressive” funding system. The university commissioned London Economics to work on the report with the aim of “widening the debate” and was not backing “one or either” of the alternatives outlined.

Indeed, Mr Purnell said, a graduate tax, by routing funding through the government to a greater extent, might allow the Treasury to “siphon off” money earmarked for higher education.

john.morgan@timeshighereducation.com