How should we fund higher education? With a free-market ‘graduate tax’

As the father of four children who graduated in the last few years, I understood and sympathised with their concern about tuition fee debts and the difficulties of finding a rewarding occupation. Technological change, globalisation and pressure on government spending have combined to make a higher education more important than ever but, at the same time, both significantly more expensive and much less certain in relation to the value of a particular course.

My new paper outlines a proposal – a ‘free-market graduate tax’ – which is designed to address all these problems. Universities would offer contracts to their students, who would agree to pay to the university they attended a given share of their earnings in return for their degree course. Essentially, the university would be taking an equity interest in the graduate premium earned by the student, although any student who chose to do so could, alternatively, pay the full fees up-front prior to beginning their studies.

This system would allow the universities to break free from the government’s purse-strings and receive their funding directly from their graduates. It aligns the interests of the university with the long-term benefits gained by its students from their education, and is the surest way to guarantee that the focus of the university is on delivering meaningful value to its customers rather than on meeting arbitrary targets set by politicians.

The approach is consistent with Hayek, who said: ‘The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design’. The paper sets out the very substantial uncertainties involved in undertaking a university education and deduces from that that politicians should not seek to control the funding of, and thereby design, the higher education system. Instead they should allow universities the maximum freedom to experiment and to learn how best to enhance the lives and career prospects of their charges – a process that is natural to academia.

There is a consensus that higher education is the best guarantor of a high paying career. But a recent study has suggested that a large proportion of what are currently graduate-level jobs may be replaced by computerisation over the coming decades. This calls for a transformation in the role of the university. Rather than simply teach a defined set of knowledge over a three-year period, the relationship needs to become longer-term and more responsive to a rapidly changing work environment.

The financial mechanism to drive this change is like a tax in that graduates pay as a proportion of their income over a hurdle level; but it’s a free-market approach (and not properly a tax) as the money passes directly to the university without government involvement. It’s fairer than the present loan system as all graduates pay the same proportion of their income (over the hurdle) and, because the highest earners receive such a high proportion of all income, it generates much more money for the universities.

With no need for government funding, regulation can be significantly reduced and universities freed to expand and develop new and innovative courses and teaching methods. They could offer further education, develop apprenticeship programmes and build on this country’s strong international reputation to generate further export earnings from teaching foreign students. Because the agreement between student and university is a contract, and not a UK government obligation, it will not matter where in the world a graduate works, they will still have to share with their university the fruits of the joint investment in their education.

The paper explains how this radical reform to university funding arrangements would lower the burden on the taxpayer; free universities of regulation, allowing them to grow and serve their students better; and give students confidence that they will get value for money and will benefit from a lifelong educational partner.

Peter Ainsworth is the author of Universities challenged: funding higher education through a free-market ‘graduate tax’.

This article was originally published on ConservativeHome.