What would a grad­u­ate tax change?

The Daily Telegraph - Your Money - - FRONT PAGE -

It may be part of Theresa May’s re­view but are stu­dents ef­fec­tively pay­ing a grad­u­ate tax al­ready, asks James Con­ning­ton

Theresa May has pledged to over­haul stu­dent loans and tu­ition fees, which could lead to the fifth fund­ing sys­tem in 20 years. Among pos­si­ble changes are freez­ing fees at £9,250 a year and rais­ing the earn­ings re­pay­ment thresh­old for stu­dents who started univer­sity from Septem­ber 2012 on­wards from £21,000 a year to £25,000.

How­ever, the Prime Min­is­ter said the whole sys­tem would be re­viewed, and a move to a grad­u­ate tax in­stead of the cur­rent sys­tem ap­pears to re­main a pos­si­bil­ity. Other rad­i­cal changes such as low­er­ing fees, cut­ting in­ter­est rates on stu­dent debt and bring­ing back main­te­nance grants are all re­port­edly be­ing con­sid­ered.

It has been 19 years since tu­ition fees were in­tro­duced, 13 years since they were put up to £3,000 a year and five years since they were in­creased to £9,000. The out­come in terms of debt, in­ter­est and re­pay­ments for those who went to univer­sity dur­ing these years has ef­fec­tively been an age-based lot­tery.

Those who fell on the wrong side of one of these changes saw the fi­nan­cial bur­den of univer­sity mul­ti­ply com­pared with someone one year their se­nior (see box, right).

But how would the most rad­i­cal of the po­ten­tial changes – a move to a grad­u­ate tax sys­tem in­stead of loans and re­pay­ments – dif­fer from the sys­tem as it cur­rently stands?

The con­tro­ver­sial idea of a grad­u­ate tax has been dis­cussed since tu­ition fees were in­tro­duced. It would in­volve a tax on all grad­u­ates that in­creased with earn­ings. There are nu­mer­ous crit­i­cisms con­cern­ing how a grad­u­ate tax would af­fect univer­sity fund­ing – but from a stu­dent per­spec­tive, what would change?

Many ar­gue that to­day’s sys­tem is al­ready more akin to a tax than a loan. Cur­rently, grad­u­ates pay back 9pc of the amount they earn over £21,000. The in­ter­est rate goes up with their earn­ings, and is also linked to in­fla­tion.

As things stand, the In­sti­tute for Fis­cal Stud­ies has es­ti­mated that 77pc of stu­dents will never pay their loan back. If the re­pay­ment thresh­old is raised to £25,000, the IFS ex­pects that fig­ure to rise to 83pc.

For these in­di­vid­u­als, a stu­dent loan debt is ar­guably a 30-year tax. How much it costs them de­pends en­tirely on the re­pay­ment rate, not the in­ter­est rate.

The in­ter­est rate does make a dif­fer­ence to those who are likely to pay off their loan, or to come within sight of do­ing so, as it af­fects the size of the debt and there­fore how long they’ll take to make re­pay­ments.

There are some el­e­ments that dis­tin­guish the present sys­tem from one based on tax­a­tion, how­ever.

First, those who ben­e­fit most from the cur­rent sys­tem are the low­est and high­est earn­ers. Grad­u­ates whose ca­reer earn­ings re­main low will make min­i­mal re­pay­ments and have a large amount of debt writ­ten off af­ter 30 years. Very high earn­ers, mean­while, will pay down their debt quickly, min­imis­ing the amount of in­ter­est – which can be sig­nif­i­cant – that they need to pay.

Those who sit in the mid­dle pay the most. They earn enough to make sig­nif­i­cant re­pay­ments, which can eas­ily eclipse the to­tal bor­rowed by a sig­nif­i­cant mar­gin. But they do not earn enough to clear the debt quickly, mean­ing that they can pay pun­ish­ing amounts of in­ter­est. It is in­di­vid­u­als from poor back­grounds go­ing on to earn rea­son­ably high salaries who are pun­ished the most, as they build up the big­gest debts be­cause of the re­cent re­place­ment of main­te­nance grants with larger means-tested loans.

Un­der a sys­tem of tax­a­tion, the ad­van­tage of be­ing a very high earner would dis­ap­pear, as the high­est earn­ers would pay the most back. In ef­fect, the pain of foot­ing the big­gest bills would be shifted from the mid­dle to the top. The best-paid grad­u­ates would po­ten­tially pay back far more than the cost of univer­sity.

Those from poor back­grounds who went on to high-pay­ing ca­reers would pay the top rate, but would not pay more than coun­ter­parts from wealth­ier back­grounds over their life­times be­cause they would no longer take out larger loans at the out­set. Well-off par­ents would also no longer be able to pay up front to pre­vent their chil­dren fac­ing the tax bur­den.

A key dif­fer­ence is how each sys­tem treats grad­u­ates based on the cost of the ed­u­ca­tion they ob­tain. Un­der both sys­tems, someone who re­ceives an ex­pen­sive ed­u­ca­tion and then doesn’t end up in a high-earn­ing ca­reer pays the least rel­a­tive to the amount spent on ed­u­cat­ing them.

How­ever, un­der a pro­gres­sive tax sys­tem someone who stud­ies part-time on a cheap course and then goes into a high-pay­ing ca­reer would end up pay­ing a far higher rate of tax rel­a­tive to the cost to the pub­lic purse of ed­u­cat­ing them.

Over­all, while there would be dif­fer­ences for some, the bor­rower’s ex­pe­ri­ence of a grad­u­ate tax would be fun­da­men­tally the same as now. In both cases, there is no up­front cost and grad­u­ates face long-term pay­ments linked to earn­ings.

The big­gest dif­fer­ence, and the fo­cus of crit­i­cism, stems from how a sys­tem of grad­u­ate tax­a­tion would af­fect univer­sity fund­ing and the Gov­ern­ment’s fi­nances. There would be huge up­front costs, as it would take decades for new grad­u­ates to earn enough to pay the top rates of tax. At­tempt­ing to in­cor­po­rate ex­ist­ing grad­u­ates to com­bat this would be ex­tremely dif­fi­cult.

Ad­di­tion­ally, the money would go first to the Trea­sury, not uni­ver­si­ties, rais­ing ques­tions about how the money would be shared. Then there are prob­lems of tax eva­sion, grad­u­ates leav­ing the coun­try and de­ter­min­ing li­a­bil­ity for those who didn’t com­plete their de­gree.

Sam Mead­ows, 24

Aberys­t­wyth Univ Grad­u­ated: An­nual fees:

£3,225

Debt at grad­u­a­tion:

£20,733

2014

In­ter­est rate:

cur­rently 1.25pc James Con­ning­ton, 23

UCL Grad­u­ated: An­nual fees:

£9,000

Debt at grad­u­a­tion:

£44,000

2015

In­ter­est rate:

cur­rently 3.5pc

In both cases, there is no up­front cost and grad­u­ates make long-term pay­ments

Grad­u­ates may face yet an­other fund­ing sys­tem af­ter a loans and fees over­haul

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