Levy on graduate earnings should replace state funding of universities


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New paper calls for reform to student loans system challenged_web.pdf
Taxpayer-financed student loans should be replaced with an agreement whereby graduates pay their university a proportion of their future earnings to fund their studies. Reforming how students pay for their degree course would substantially benefit students, universities and taxpayers alike.

Tying universities’ income to that of students would encourage greater flexibility in the services they provide and ensure that they have an incentive to produce successful graduates.

In Universities challenged: funding higher education through a free-market ‘graduate tax’, Peter Ainsworth calls for tuition fees to be replaced with a payment method by which universities receive an agreed proportion of a graduate’s future earnings. The current malfunctioning system of student loans should be abolished.

Universities would be entirely free to agree with their students the details of the financial arrangements. Some universities are already developing variants of such a system.

Problems with the current system:

·       Courses have become rigid, often designed to look enjoyable rather than useful. They often fail to provide students with the necessary skills and the support they need when they enter the workforce.

·       Young people are incentivised to attend university regardless of whether or not they benefit from their course. Many students attending university will never have sufficient earnings to repay their loan. Universities, nevertheless, receive state funding in return for admitting such students, at significant expense to the taxpayer.

·       Student loans are currently arranged on terms inconsistent with most ordinary loan agreements and would be classed as unfair in the private sector. The government can arbitrarily vary the level of income at which repayment must be made, the proportion of income taken each month, the rate of interest and the length of time that can elapse before the loan is forgiven. This results in substantial uncertainty for graduates.

Benefits of the proposed new system:

·       Replacing student loans with a levy on future earnings would drastically improve value for money for graduates. Having a direct interest in the future income of their students, universities would invest substantial time and money to help graduates succeed in the jobs market.

·       The proposed scheme would motivate universities to offer greater flexibility in terms of the nature, length and focus of degree course subjects.

·       The decision to attend university carries considerable financial risk. Offering greater diversity across and within courses would encourage students to consider part-time options, leading to a rise in participation.

·       Students who have little wish to study or gain a high paying career would no longer be as attractive to universities, as the income received would be unlikely to offset the cost of educating them.

·       The method by which universities charge for degree courses would be considerably fairer under such a scheme. Under the proposed system all students would make a contribution if their earnings were above a certain threshold and the contracts would be written to enforce repayment worldwide.

Commenting on the research, Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, said:

The current system of student finance will fail. It combines all the worst features of a graduate tax and a student loan system and gives little incentive for universities or students to succeed.

“The proposals laid out in this report will free universities from stifling regulation, and ensure that they offer students more variety in the duration of courses and give greater consideration to the future success of their students.”

Notes to Editors:

To arrange an interview (live or pre-recorded) with an IEA spokesperson, please contact Camilla Goodwin, Communications Officer at [email protected] or call on 0207 799 8920/ 07821 971 443.

The full paper, Universities challenged: funding higher education through a free-market ‘graduate tax’, by Peter Ainsworth, can be downloaded here.

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