The current system of financing higher education is stuck in a rut. It does not work particularly well for anybody: A lot of students end up saddled with debt; large amounts of debt have to be written off, effectively shifting the cost to taxpayers, and too many universities remain underfunded. Student protesters usually argue that universities should be wholly taxpayer-funded and free at the point of use, but that would create its own set of problem, and raise problems of fairness and equity: Why should non-students subsidise students, if the latter, on average, enjoy much higher lifetime earnings?

Peter Ainsworth makes the case for a completely different system of financing higher education, namely one which aligns the incentives of all stakeholders are properly. Under a ‘free-market graduate tax’, universities would effectively become equity holders in human capital. They would be entitled to a share of each former student’s earnings, thus earning a return on the human capital they helped to create, in the same way in which shareholders earn a return on physical capital. This would fundamentally change incentives. Universities would become much more interested in ensuring their alumni possess valuable skills, and are able to put them to good use.

In this video, Peter Ainsworth outlines his alternative model, which he also explains in greater detail in the Discussion Paper ‘Universities challenged: funding higher education through a free-market ‘graduate tax’’