Graduate Contribution and a Higher Education Fund
I was the first person in my family to have the chance to go to university. I know how much it transformed my prospects and, in many ways, my life, so for me like so many others, making sure the system works for the students in it now really matters.
Of course, understanding the higher education funding system we have in our country is like taking a degree in itself; it’s pretty complicated. Many people will confess they don’t really understand how it works; yet the debate over tuition fees and the taxpayer loans that students need to fund them has been one of the most controversial political issues of our time.
The Current System:
Let's start with how the system currently works. Overwhelmingly, all degrees cost students £9k per year in fees and that fee money is provided up front by the taxpayer and then is owed back to the taxpayer as a loan paid by the student.
Most students also have to have another loan of cash from the taxpayer to fund living costs - that’s called the maintenance loan. It used to be a grant.
Not all students need a loan to pay the fees and living costs. Some families are wealthy enough to simply cover the fees (not many), but many more better off families understandably help out with living costs for their children at university. So students from more disadvantaged backgrounds who don’t have parents who can help out with living costs, often end up leaving university with more debt than their better off peers, which isn’t good for equality of opportunity.
The more complicated bit is how students then pay back the money they’ve borrowed from the taxpayer.
The way it works is that graduates have an extra “Graduate Contribution” that is taken out of their payslip to pay off the taxpayer loan, but in order to be affordable they only start paying it when they’re earning above a certain income threshold (£25k from April) and then pay 9% of the extra earnings above the threshold. It’s like an extra surcharge on top of income tax and national insurance and is collected at the same time by HMRC to pay off their taxpayer “loan”. Most graduates won’t pay enough Graduate Contribution over 30 years to pay off their loan. The taxpayer writes off the rest.
And amidst the complexity it has meant proper, sustained funding for our world-class universities and real investment in high quality degree courses, which is why the OECD has praised our system. Crucially it’s meant that unlike Scotland, we have been able to remove any cap on student numbers. Now, if you get the grades, you can go to university. That is a huge boost for social mobility and we’ve seen record numbers of disadvantaged young people now getting to university for the first time.
But that doesn’t mean our system can’t be improved, and it doesn’t mean we should just assume it will continue to deliver more opportunities for more students, forever. As fees have risen, the level of debt has grown. While the gap has narrowed between the proportion of disadvantaged young people going to university and their better off peers, it still remains wide.
In announcing a major review of student finance, the Government has at least opened up the possibility of looking at what a better approach might be. Resolving this issue matters if we are to become a country where there is equality of opportunity, and it is far too important to continue to be kicked around like a political football by Westminster parties. Young people deserve better, and universities, often major employers in their local communities, need certainty.
In practice, you can mend the current system, perhaps by reintroducing maintenance grants and tackling punitive interest rates, or make more fundamental changes. For this, ideally there needs to be a broad consensus.
A Higher Education Fund reform:
A broader reform could bring real sustainability to higher education financing if the Government is prepared to think for the long term. It would involve reworking the parts of the current system that don’t work, but also keeping the sensible elements that do work.
Firstly, maintenance grants should be reintroduced. To remove them was regressive and this mistake should be rectified. Under the current maintenance loan approach, students from lower income families less able to help them with living costs, come out with more debt, like for like, than their better off peers. That’s unfair and cannot be allowed to continue.
Secondly the Graduate Contribution should stop paying off a “loan” and instead be paid into a Higher Education Fund (akin to National Insurance funding the NHS/pensions).
All graduates should pay for the full time period, not just the lower-earning 70-80%. That would mean that fairly, the graduates that earn the most from having a degree would pay the most into the Higher Education Fund. As a higher proportion of adults in the future are likely graduates, Higher Education Fund costs could be spread more thinly across more graduates.
Graduates should fund the higher education system they benefit from, rather than those people who don’t. Most students do feel there is an issue of fairness about this; that their peers who do not go to university should not have to pay for those that do, especially when graduates are likely to do better in future earnings as a result of having a degree. I think that’s right - broadly, those who benefit from university degrees should pay for them.
Employers could also contribute to the Higher Education Fund for degrees that are critical to their organisations, for example STEM degrees. Bursary strategy could fit into the HE Fund. A reform of the apprenticeship levy to become a wider skills levy could be a way to effectively channel extra funding and incentives to plug the skills gap and give employers some of the flexibility that they are asking for in the apprenticeship levy. It would require looking at the levy rate.
The impact of this would be a reformed system with a Higher Education Fund that:
=> Is progressive not regressive: Graduate Contributions go to a Higher Education Fund, financing current students to get the same opportunities to go to university that graduates have had. This is the exact opposite of the unfair proposal by Labour at the last election to scrap fees and have university funding paid for by general taxpayers - it was hugely regressive.
=> Tackles debt aversion: a Graduate Contribution based system means no annual interest statement with a loan and interest rate. Potentially over £100m annually saved by not having the Student Loan Company calculating, preparing and sending out those annual loan statements.
=> Means better decisions for young people considering university: Not “are my (extra) future earnings worth taking out this student debt for?” which most won’t pay off anyway - but instead “are my future extra earnings only possible if I have a degree?”.
These reforms mean that those graduates from disadvantaged or from better off backgrounds who want to go into public service or socially valuable but relatively lower paid roles per se, will not do so with an impossible debt hanging over them. Likewise, those that do the best financially from their degree - again, irrespective of background, will contribute the most into the Higher Education Fund to continue to finance a world-class higher education system for current students.
Finally, and optionally, universities could be funded for the actual costs of delivering the course rather than the present flat £9k fee. The Higher Education Teaching Grant already bands different degrees on costings, recognising that some, such as STEM degrees, require extra money to cover higher costs. Universities themselves cross-subsidise from lower cost degrees to higher cost degrees. The taxpayer has no sight of this. Instead, doing this at the national level with a banding system (similar to the teaching grant system which already exists for the Teaching Grant to top up STEM degree costs) would also give taxpayers a better driver for ensuring value for money of the same sort of course at different universities and also in relation to the differing career and earning outcomes for graduates.
The major review into higher education finance is an opportunity to take a fresh look. It should be guided above all by changes that are fair so those who benefit the most, pay the most, and that help deliver equality of opportunity. After that, value for money and a system that works with the grain of delivering what the UK economy needs are also important.
I hope that those conducting the review take this opportunity.