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The painful truth about student finance reform

Nationalist or socialist, liberal or conservative, there is one political issue that almost every student can agree on – no one likes paying tuition fees. A three year degree at a UK University now costs a good annual salary. If you are an international or graduate student, it can be even more – you’d better find yourself a generous employer, a large scholarship, or some very serious loans.

It hasn’t always been this way, though. Until 1999 – the year I was born – Higher Education was free in the UK for British students. In living memory, students were not expected to pay anything towards their education costs.

Slowly throughout the following fifteen years, the ‘free-at-the-point-of-us system’ that existed for decades before the millennium unravelled. Tuition fees trebled in 2011, fundamentally changing them from a ‘top-up’ to what the government spent to a full-on education market, with even maintenance grants being abolished in 2016.

The current system, however, is not all that it seems. You do not make repayments on your loan unless you earn more than £25,000, and above that you pay 9% of your additional earnings. Furthermore, since the interest rate on the loans is very high, many people will never pay it all back.

Consequently, for many people, tuition fees already behave like a tax. Admittedly, it is a bad tax – regressive and avoidable if your parents or employer can fund your tuition, but it is virtually a tax on graduates.

Nevertheless, the abolition of tuition fees and its replacement either with an explicit graduate tax or funding from general taxation is a contentious point of debate.

University funding, whatever form it takes, poses a policy ‘trilemma’ – you cannot have high quality and well-funded universities, affordable costs, and high student numbers. We could go back to the pre-1992 situation, with tight restrictions on how many people could go to university, we could cut funding per student, or we have to find some way to raise money. We cannot avoid all three.

The graduate tax vs general taxation vs tuition fee debate, then, is mostly about distribution of payment. How much of the cost of Higher Education should be paid by graduates versus the general public, and how much by high income graduates versus lower income? Does it matter how rich your family are or how rich you are after graduating? These questions are important, but ultimately not related to whether we pay via fees or taxes.

Tuition fees manifestly do not work as intended. For all the talk of ‘marketisation’, there is no price competition and only limited quality competition.

Why? Because education is what economists call an ‘experience good’ – you can’t reasonably assess its quality until you have consumed it. Consequently, reputation and brand dominate in the market.

Given how things have turned out, it would better to acknowledge that it’s essentially a tax, and stop the pretence of ‘repayments’ or the opportunity for the rich to avoid it. The problem for those of us on the left, however, is that transitioning from tuition fees to a graduate tax is not straightforward.

The Treasury sets aside some money to underwrite tuition fee loans each year, but it is the Student Loan Corporation that actually pays out the fees. Since you would not pay a graduate tax straight away – perhaps even for many years after graduation – the government would be immediately liable for all university funding. The 2017 Labour General Election Manifesto budgeted around £11.5 Bn for the abolition of tuition fees, likely an underestimate now due to increased student numbers and inflation, and this would need to be paid before a graduate tax would begin to generate any revenue at all.

A government could borrow the money, in theory. The SLC is essentially part of the government anyway; it is accounting smoke and mirrors to put tuition fees on a separate entity’s balance sheet. Unfortunately, that case needs to be made not to me, but to the markets and voters. Given the blowback to Liz Truss’s unfunded tax cuts, it seems unlikely that a government could borrow £15Bn without problems.

He could pledge to raise other taxes for a while to fund the transition, but a £10 – 15Bn tax rise is a very big deal. It’s more money than the Corbyn-era corporation tax hike was set to raise and of similar magnitude to the Conservative Party’s proposed Health and Social Care Levy. That is serious money which is hard to justify on Tuition Fees when there is so much else for the next government to tackle.

The only feasible way to move to a graduate tax, then, is slowly. Starmer (and Sunak, though that feels a little optimistic) should pledge taxation-based solutions for lowering tuition fees and reinstating maintenance grants, with the eventual aim of a hybrid system in which fees cease to function as a bad pseudo-tax. However, he cannot credibly promise to abolish tuition fees in the next parliament.

That reality is not going to be popular with fellow students, but the political, economic, and fiscal reality will not flex. We live in a world in which positive change compounds; a small amount of positive change will add up to a very different world in the long-run. We cannot overhaul the university funding system overnight, but the next generation can inherit something much, much better.

Image credit: Rawpixel / CC0 1.0

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