Business and universities should pay more for higher education

In December, the UK’s Office for National Statistics announced a technical but tremendously important adjustment to the way that student loans should be accounted for by the government, which could add up to £12 billion a year to the budget deficit.

Under existing rules, student loans do not count towards current government spending because it is assumed that they will be repaid in full. This means that a lot of recent government financing of higher education has technically been done off the books, allowing the per-student funding for an average university to rise by 25 per cent even during a decade of belt-tightening, thanks to 2012’s tripling of the tuition fee cap.

The truth is that this system does add to the government’s deficit – substantially so – but, currently, only several decades ahead, when a large chunk of student loans will be written off.

Thankfully, the ONS has put an end to the fiscal trickery. It proposes that current estimates of how much will never be repaid should count towards the present-day budget deficit. This means, quite rightly, that there will be immediate fiscal consequences to policy decisions made about the student loans system, leading to overdue pressure to make the system more affordable for taxpayers.

The Augar review, which is due to report shortly, will be examining common policies proposed by politicians and pundits: cutting the tuition fee cap, reducing the interest rate on student loans and restoring maintenance grants.

All these appear helpful. But, in reality, none would do anything to reduce government subsidy and would be deeply regressive since the only actual financial beneficiaries would be the most affluent graduates, who would not need to repay as much.

It is time to stop looking only to graduates or taxpayers to pick up the bill for this broadly progressive but expensive student loans system. There are other major beneficiaries of higher education that should contribute a little more to finance it: businesses and universities themselves.

Large employers with a sizeable graduate workforce should pay a graduate levy. Employers may complain that they already contribute significantly through taxation. True. But individual graduates also pay considerably through generally higher levels of personal taxation: their student loan repayments are on top of this.

The cost of the levy could be a modest fraction of employers’ overall pay bills, indexed on a gradual scale (avoiding steep and distortive cliff edges) to the proportion of their workforces with a degree.

Such a levy would be unlikely to deter large employers from hiring graduates. Robust evidence shows that graduates, on average, add substantially to productivity. That is why companies are willing to pay a persistently strong graduate salary premium. The value added that graduates bring should easily outweigh the costs of the levy to a large company. If an employer thought otherwise, it would diversify its recruitment.

Most universities have also done very well out of the current student finance system. There is little risk to them in charging the maximum fees permitted: students are not particularly price sensitive when they are not paying up front from their own pockets. And taxpayers, rather than universities, subsidise those graduates who do not repay their tuition fee loans fully.

The new Longitudinal Education Outcomes dataset makes it possible to accurately predict which universities will produce large numbers of graduates who will have their tuition fee loans written off. These universities should pay a financial penalty. A new university levy would help to subsidise the student loan system, either directly or indirectly, because some universities could, in response, lower their tuition fees.

In all honesty, some high-quality institutions that work with students from low-income backgrounds and produce graduates who go into modest-paying economic sectors would be unfairly and unhelpfully penalised by this. To compensate, existing direct teaching grants could be better targeted at such universities, introducing, in effect, a social mobility and teaching excellence premium.

As a result of the ONS’ welcome decision, the government will have to be more careful and thoughtful about how it finances the higher education sector. Here’s hoping that ministers look beyond taxpayers and graduates to contribute.

Ryan Shorthouse is the founder and chief executive of Bright Blue, a liberal conservative thinktank.