A graduate tax is for life, not just for a few years

Student loans are a far fairer way of paying for university, says Nicholas Barr

The National Union of Students has argued for a graduate tax, where those who have been to university pay extra income tax to contribute to the cost of higher education. In important respects, the NUS is right.

At present, when a student goes to university, the Student Loans Company pays money into her bank account to pay for living costs and pays her tuition fees directly to the university. Many people still think they have to hand over a large cheque to pay for fees. They don't. University is free, or largely so, for the student.

Loan repayments are a fraction of a graduate's earnings collected each month as a payroll deduction, alongside income tax and national insurance contributions. A graduate with low earnings makes low or no repayments, and anything not repaid after 25 years is forgiven. Thus loans - deliberately and rightly - have inbuilt insurance against inability to repay, protecting graduates who do not do well financially out of their degree.

Many people conflate student loans with credit card debt. This is plain wrong. A credit card debt of £20,000 rightly causes parents sleepless nights. Student Loans Company debt is very different - low interest rate, long repayment period, and no repayments when income is low. What parent has sleepless nights over their child's future tax bills - even though a typical graduate over a full career will pay around £1m in income tax and national insurance contributions?

Thus university is free to the student, and graduates face an income-related payroll deduction when they start earning. The government should be loudly cheered for bringing in this system and noisily excoriated for its complete failure to get across to the public that this is how it works.

The good news for the NUS is that for the individual the present system differs from a graduate tax in only two ways: repayments do not go on for ever (or until retirement), as in the NUS proposal, but stop once the individual has repaid the required contribution; and the present system is more transparent - graduates know what they are being asked to repay. This may cause political ructions - but I'm in favour of transparency.

What about access, which the NUS rightly makes a central concern? Though it sounds obvious that fees harm access, the real problem occurs much earlier. The evidence is striking that what determines participation in higher education is how well a person does at school.

In 2002, 81% of the children of professionals went to university but only 15% of the children of manual workers. This was the shameful story before variable fees; it is broadly the same story now.

Yet if we look at young people with good A-levels, about 90% of both groups go to university. Access fails when someone leaves school at 16, usually for reasons that go back much further.

If I were given money to widen participation, I would spend it on raising attainment from nursery school onwards, on raising aspirations, and on demystifying universities through student mentoring schemes, Saturday schools and similar activities. Grants and bursaries matter, but linked to policies to encourage people to stay on after 16.

Since we already have something very like a graduate tax, should we go the whole hog and have a system where graduates pay an extra tax for life, irrespective of the cost of their higher education? Here, I part company with the NUS.

Loans have important advantages, some of them listed below, relative to a comparable graduate tax. First, loans support variable fees, hence foster competition to the benefit of students and employers. Why the emphasis on competition? The answer from economic theory is that competition is useful where consumers are reasonably well-informed, which is the broadly the case for higher education. Thus competition, with suitable regulation, benefits the student.

Second, with a graduate tax the money goes to the Treasury. The Treasury continues to control total spending on universities, and Oxbridge and Balls Pond Road tech compete for the same funds. With variable fees, funding becomes open-ended; and the money goes to universities.

For anyone who believes in responsiveness and university autonomy, these are two major advantages.

Third, and deeply practical, loans make it possible to require repayments from students from other EU countries.

The bottom line is that we have the best of both worlds. Graduates face what looks like a graduate tax, but one that does not go on for ever. And universities face a system that encourages competition and strengthens university autonomy. Next stop - nursery education!

• Nicholas Barr is professor of public economics at the London School of Economics. http://econ.lse.ac.uk/staff/nb

Today's best video

Today in pictures