When it comes to higher education policy, Labour is asking itself the wrong question


(Note: I published this piece first at the London School of Economics’ General Election 2015 blog on 06.02.15…)


“How can we bring down the headline £9,000 per year figure?” seems to be a challenge that Labour Party policymakers have set themselves ahead of the General Election, perhaps concerned that higher fees could deter participation, especially among society’s less privileged groups, and that too many student loans are being written off. These are valid concerns and, to some extent, the “intense focus” on the £9,000 headline figure is justified: since English universities became the most expensive in Europe, enrolment rates for mature and part time students have fallen sharply. Moreover, estimates continue to suggest that the new funding system will prove more expensive for the taxpayer than the one it replaced.

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But there’s a risk that trying to reduce the headline figure will actually cause further damage. The first thing to remember is that £9,000 is an irrelevant sum to most graduates because they’ll never repay their debt in full. Whether higher fees deter young people from applying to university is difficult to gauge. There’s no evidence to support that position yet, even among those from the lowest socio-economic quintile, but it is possible that early trends are being skewed by a lack of meaningful labour market alternatives.

Labour is reportedly toying with the idea of capping fees at £6,000 per year. But university VCs are already demanding to know how the lost revenue would be replaced. It would be a bold government that asked the Higher Education sector to do it all a bit cheaper. Relative to the share of GDP received, many indicators suggest that UK universities already punch above their weight.

One solution would be to change the income threshold at which graduates begin their repayments. At the moment, it’s £21,000 per year. It would be very easy for any government to raise revenue by reducing this threshold, or by freezing it as inflation rises, thereby making graduates repay more of their loans more quickly. But such a move raises all kinds of equity issues. Remember that when £9,000 fees were introduced the biggest losers, relative to the previous model, were middle earning graduates. As the Sutton Trust noted, the “average teacher” would now pay back around £42,000 of student debt, and still be making repayments when they reach their early 50s. Under the previous system, the same teacher would have repaid around £25,000 and completed at the age of 40. In relative terms, changing the income threshold would hurt low and middle earning graduates more than those on higher incomes, and cutting the headline figure to £6,000 may well have a similar effect.

So what are the alternatives? As a recent report by the Higher Education Commission concluded, there’s no ‘silver bullet’ when it comes to higher education funding. But the question that Labour might want to begin asking itself is “Can those who benefit most from Higher Education contribute more?” Such thinking immediately brings to mind the Graduate Tax, a phrase that increasingly means whatever its user wants it to mean, as several commentators have noted. A ‘pure’ form of Graduate Tax, levied against all income at the same rate, would be controversial for practical reasons – very high earners may choose to leave the country rather than keep paying. It would also raise issues of fairness – should any graduate be required to foot the bill for their degree thousands of times over?

The kind of funding system that Labour might want to think about is one that demands more for longer from the very highest earners. At the moment, it’s possible for some graduates to repay their loans relatively quickly, thereby dodging interest. But what if everyone had to contribute something for the full thirty years? Just a regular flat, fee for those lucky enough to have finished their loan repayments and still be earning a healthy salary?

Would anyone complain about fairness if the resultant income allowed the 2012 funding system, with its safeguards for lower earning graduates, to be preserved at less expense for the taxpayer? And for the all-important repayment threshold to rise with inflation, as promised, for all graduates? Might it even allow further support for students struggling to get by on inadequate maintenance loans, or for hard-hit groups, such as mature and part time students?

The main opposition to a Graduate Tax seems to be ideological rather than economic. We’re told that, in the marketplace of Higher Education, “competition, with suitable regulation, benefits the student”. To treat all graduates equally is to make free market behaviour, such as price discrimination, more difficult. And that raises the toughest question of all: “What are universities for?”

Is the optimum model of Higher Education is one that drives up quality by using dubious metrics to pit university against university? Or should the goal now be to reclaim Higher Education as a public good as well as a private good, and to accept that some graduates will earn more than their peers simply because they enter better-paid professions? Labour need to ask the right question.

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What can defuse the student loan time bomb?

(Note: I published this piece first at The Conversation….)

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According to a new pamphlet issued by the Social Market Foundation, “the Tories’ student loan system that finances our universities, voted through by the Lib Dems, is a timebomb waiting to go off”.

The author Liam Byrne, Labour’s shadow minister for universities, science and skills, rues a “free-market experiment gone wild”, but offers few insights into Labour’s preferred alternative. There is no shortage of ideas out there for him to choose from.

The reason the system isn’t working is because, on current estimates, 45p for every £1 borrowed will never be paid back.

In a recent statement, the Russell Group dropped several hints about what Britain’s leading universities think should happen next in terms of student funding. Responding to a Business Innovation and Skills Select Committee report that also warned of an “increasingly fragile” system, the Russell Group pointed out that graduates currently pay back “only” 9% of their annual earnings above £21,000. This, they noted, was a “far” higher repayment threshold than under the previous system before the new fee regime was introduced in 2012.

The statement added that the government “can, of course, change these repayment conditions in order to increase the amount of money repaid, if they so choose.” With this line, the Russell Group acknowledged that the 2012 system requires change, but stopped short of calling directly for new thresholds for student loans to pay their loans back. The decision for that would remain the government’s, as would any subsequent blame.

Who benefits from a lower threshold?

Some, such as LSE’s Nicholas Barr, have explicitly advocated a lower opening repayment threshold. £21,000 is an arbitrary figure, for which no specific rationale was ever provided. If it were cut to, say, £15,000, a graduate earning £20,000 per year would still repay only £37.50 per month (compared to nothing now). A graduate on £25,000 would pay £75 (compared to £30 now).

However, such benign calculations do not address the broader question of whether lower-earning graduates should be hit harder than their higher-earning counterparts.

The graph below is a crude initial attempt to visualise how a reduced repayment threshold would affect graduates’ total lifetime repayments.

 

The blue blocks represent how much four types of earners would currently pay back, in today’s money, in return for borrowing £9,000 in fees, plus £5,500 maintenance per year, using the defaults currently set on a popular student finance calculator.

The red blocks represent approximate total repayments under a lower £15,0000 threshold for the same four groups of earners. The groups are those with starting salaries of £20,000, £30,000, £40,000 and £50,000 respectively.

As the graph shows, a reduced threshold would hit lower earning graduates harder than higher earning graduates (excluding those whose incomes never rise above £15,000 and who therefore receive full debt forgiveness). Higher earning graduates would be slightly better off.

Punishing middle earners

Note that in neither system do the very highest earning graduates repay most. As explained by the University of Bristol’s Ron Johnston, the 2012 system is regressive because high earning graduates complete their repayments earlier and thereby accrue less interest on their debt. Cutting the threshold at which repayments begin would both benefit and enlarge this group. They’d be the winners.

The losers would be graduates who aren’t high earners. As noted in the Sutton Trust’s report, Payback Time, under the 2012 system an “average teacher” will pay back around £42,000 of student debt, and still be making repayment in their early 50s. Under the system that was withdrawn in 2012, the same teacher would have paid around £25,000 and complete at the age of 40. The danger is that tinkering with repayment thresholds makes the current system even more punishing for such graduates.

On the surface, keeping a loan-based system has its advantages. The Russell Group is right to point out that UK universities punch well above their weight relative to the proportion of GDP that comes their way, and though the 2012 system failed as an austerity measure, it has safeguarded overall funding levels for most students.

What’s more, fears that the 2012 fees hike would deter young people from lower socioeconomic backgrounds from enrolling on full-time degree programmes appear not to have materialised. This summer’s figures have shown an 8% increase among the poorest groups (though the number of mature and part-time students has fallen alarmingly).

Give graduate tax a go

An alternative approach that receives less attention is that of a graduate tax. Understandably, some commentators have expressed concern that “hypothecated” taxes (ones earmarked for a specific purpose such as a graduate tax) might be diverted elsewhere by capricious future governments. But the principle that England’s highest earning graduates should contribute the most (or, at least, as much as their middle earning counterparts) is one that would surely enjoy popular support.

Liam Byrne is right. Today’s students are, as he says: “highly anxious about taking on an average of £44,000 worth of debt in an uncertain job market where nearly half of employed recent graduates are in non-graduate jobs.”

Of course, a graduate tax would make it trickier for universities to compete on price and therefore sits uneasily within fashionable, “student-as-consumer” thinking. But the alternative is that the cost of higher education, having already been transferred from taxpayer to graduate, could be further shifted from those who benefit most to those who benefit less.