Vince Cable says some very sensible things (see my last post: Banks deserve criticism for bad service – but not for refusing to lend). But he also comes up with some really silly ideas. During the election, a prime example was the mansion tax. Now it is the graduate tax – or “contribution”, as he calls it.
Higher education is expensive. It has to be paid for, and it is good if those who benefit most from it are the ones who pay for it. But taxing graduates is not the way to go about this.
The arguments against it are pretty obvious. It is, as Minette Marrin, puts it in the Times, “statist, invasive, interventionist, bureaucratic, demoralising and unnecessary”. It will allow and encourage constant state interference in the university system.
It will create yet another disincentive for high earners and hard workers: keep your nose to the grindstone and get a first in physics followed by a good job and you’ll pay more tax than someone who spent their university years drinking in All Bar One. Once again, as a letter to The Independent puts it, “we find a way to reward failure and punish success”.
It is also, to an extent, a double tax. If you are successful you already pay more tax than if you are not – often more than double the rate and many, many times the absolute amount. That’s the whole point of the way our tax system works.
And, finally, in the form it looks like Cable intends it to take, it just goes on too long: a university education takes three years to get – it doesn’t make good psychological sense to make people pay for it over 40 to 50 years.
However, all of this also raises the question of what exactly is wrong with the current system whereby students borrow the money they need for their degree and pay it back gradually. Students hate their student debt, but they probably shouldn’t.
Why? Because however much they might think it is, it simply isn’t the same as a real debt. The interest rate on it is generally the same as inflation, so the debt never grows in real terms as it would were it a real debt. Payments are not linked to the amount of the debt, but to income – ability to pay.
If you aren’t earning over £15,000 you don’t have to pay anything. If you haven’t paid off your loan after 25 years, it gets written off. If you die, it gets written off. It isn’t on your credit reference file (so can’t affect your odds of getting a mortgage and so on) and it is secured against no assets – no one can take your house because you haven’t paid your student loan.
The system isn’t perfect, of course, but as my ex-hedge fund manager friend pointed out in a recent rant, this is a “fantastic way to borrow money” for everyone, regardless of how rich or poor they are when they start out at university. And the fact that anyone might think it is not is purely down to a “failure of information on the part of the government”.
So instead of finding new and more complicated ways to pay for university education, the government would be much better simply working harder to explain just how favourable – and, for the students, risk free – the current system already is.