The graduate tax is a daft idea – the current system works

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.

  • Phil

    Psychologically, knowing that you will graduate with a debt of 30 – £50K is a big issue for people who are brought up to live within their means. On the other hand, a tax, incurred because you have benefitted from a state service that many other people haven’t had , is psychologically more acceptable.

    What is unreasonable about someone who earns £100K because they have benefitted from a state service paying more for that benefit than someone who earns £20K? A graduate tax of this nature might help to reduce the real gap between rich and not-so-rich in society.

  • JAW

    The free market scenario for university education would be universities receiving no State funding, relying on course fees, endowments by alumni and benefactors, and commercial spin-off from research. The result would be just a handful of universities could survive. Fees would be $45,000
    per year, as they are in the USA.

    The present partial State subsidized system needs to be as efficient as possible… and it is woefully not. Universities are still living in the Middle Ages when they were founded. A don or lecturer in an elegant room conversing with 8 to 12 students is ridiculously inefficient, and I assure you the student receives no better quality of knowledge transmission than sitting in a 150 seat lecture theatre. As a graduate I have experienced both.

  • JAW

    Generally, the quality of University education is poor. It is not worth £30,000 in fees and loans. You would give yourself a better education by buying £30,000 of books and creating your own library. What do you think lecturers do… they read the books before you and précis them into lecture material. That is all you get… a précis. Uni education is over-rated and most go just for the certificate or the invigorating campus life.

    The expansion of Universities under Labour merely brought more third rate lecturers and third rate students into the system. That is fine if the students can fund themselves, but poor quality lecturers have not enhanced the system. Time for them to be made redundant.

  • JAW

    In truth, the current system is not working…

    We live in the electronic age and the old Medieval teaching methods have to go. Today, via the internet or DVD, the cream of Oxbridge and London Uni professors and lecturers should be teaching a million plus students. It should be a requirement of State funding that every university videos its best lectures and courses and makes them available to the Nation via the web. Berkeley already does so. Then anyone could enrol in any degree course, a la Sorbonne, either in personal attendance or via long distance from home. The fees would be minimal. No student loans would be necessary. No extra taxation necessary.

    It is just a matter of time before someone starts the first World Free University on the web. It should be a British innovation, our gift to the Second and Third Worlds. Electronic universities…that is the way the future is going. Actual physical universities will crumble into disuse. There will be no fees.

  • Roberto Birquet

    Rubbish! and the idea that our universities are poor; utter poppycock! the description – statist, invasive, interventionist, bureaucratic, – the boring cliched conservative response.
    We have among the best-rated universities in the world. It seems many of you and the increasingly less admirable Ms SomersetWebb are living in the ivory towers where the wistful consider university to be.
    I have a working-class background. The debt levels facing people from gaining a degree are rising and do put people off; and leaves them handicapped at work. Another disincentive? Nonsense. Go to uni; no debt when you leave; only pay back if earning good dosh, only pay more , if earning great dosh. You are living in another world to millions.
    The free-market JAW waffles on about just means no university for millions. University should be based on ability to learn, not ability to pay. Are you scared of competition from the poor, and middle income families?

  • Roberto Birquet

    And do remember, not everyone seeks the best-paid work. A lot of people want a degree, education but then work in research, education, healthcare. The world cannot be rationalised as everyone starts from the same place, has equal chances to advance, and all want economic glory.

    I would have thought the implosion of laissez-faire economics had taught people that the 230-year old philosophy of Smith is hopelessly fanciful. But it seems people just prefer their cosy certainties.

  • KieranO

    What we need is a system that rewards hard work, and encourages people to take degrees in subjects that the country/world actually needs!

    If someone wants to take a degree in media studies they can bleedin’ well pay for it themselves.

    If however they get a first in physics from somewhere like imperial then they get their loan wiped out.

    Or we could have a reward table, so that the top number of students in a certain subject get their loans wiped out.

    So the top
    1000 physics
    1000 chemistry
    1000 Electrical/Electronics Engineering
    1000 Mech Engineering
    1000 Aerospace Engineering

    students get their loans wiped out, of course we’d need a national exam, that wouldn’t be a bad thing and it shouldn’t be compulsory.

    In my view subjects like Economics, English, History, Media Studies, et etc should not be included in such a scheme.

  • stephen b

    Higher education is on the edge of a wave of creative destruction due as usual to technology.
    Distance learning will cease to be a minority form of education and will go mainstream. The internet will allow new ways of learning which do not involve taking on crippling levels of debt, helping to democratise learning and achievement.
    I’ve been looking at some start ups in this area but there is still a lot of potential for the private sector as the inertia of state-paid higher education means it lacks the dynamism to psh this through.

  • Mutt

    Why is a £30K debt invested in ones own education a big issue but not £200k mortgage in a pile of bricks?

  • Crashed Gordon

    Yes regrettably not one of this governments better ideas – sounds like just shooting from the hip to me

    C’mon David your doing an excellent job otherwise dont let these goofballs muck it up.

  • Dexter D

    I think some of you are missing the point. With our fractional reserve banking system it needs to make new loans in order to multiply the money supply so they can lend to more sheep coming through the gates. Every new loan allows the banks to multiply those funds and lend out more money and thus receive more interest from those loans.

    It’s in the banks interest to lend more money which is backed by a government guarantee.

    The higher the bank profits the more tax they pay into government coffers. This merry-go-round benefits everyone except the student that takes a degree in air guitar.

  • Dexter D

    We need to go back to producing things in this country and that means proper apprenticeships. There’s only so far we can go than trying to buy our way out through consumption (mortgages/car loans/credit card hols).

    Do we really need another supermarket/KFC/MackieDi’s where growth is achieved through paying bods the minimum wage joint -funded by our social security system.

    I predict a “Buy British” sentiment in a few years. Any firm that can manufacture at a half decent cost base should do well in the coming years along with the apprentices they’ve employed.

  • Paul

    Graduates really should not worry about student debt. What is £50 odd taken from your salary each month? It doesn’t get counted against you like real debt – only your monthly repayments are taken into account. A small price to pay for a great experience and a career at the end of it. If you choose not to go to uni because of the debt, your career options in the future will be severly limited.