Tax all graduates to pay for universities (even if they graduated years ago)

The June general election in the UK has put student finance squarely back on the political agenda. The Labour Party’s election promise to abolish tuition fees proved popular with young voters, presumably particularly with young students and graduates.

At a time when political debate is normally dominated by the concerns of older voters, Jeremy Corbyn, the Labour leader, is seeking to address issues that concern the younger electorate. Student finance, along with housing, is one of the most explosive, not least because it provides such a clear example of the growing generational inequality in our society. 

The current system of student finance is highly inequitable, as well as increasingly expensive, and it is threatening to get out of control. Students are taking on debts of up to £50,000, which many will never earn enough to repay in full, and this will land taxpayers with an estimated 43 per cent of the loan bill (and more, if fees are allowed to rise continuously).

It is also increasing inequalities both within and between generations. Fees for undergraduate courses are much the same, so graduates are expected to repay similar amounts regardless of the financial benefits of their particular qualifications on the labour market. At the same time, the system increases intergenerational inequality as one generation is paying for a public service that previous generations had for free.

Students who started their courses after 2012, and now face annual fees of up to £9,250, will be paying off their loans throughout much of their adult lives while also paying high proportions of their incomes on rent or mortgages.

So, Corbyn is right to pledge the abolition of the current funding scheme. However, his promise to return to funding higher education out of general taxation may not be the best alternative.

Higher education has become very expensive, with the total costs, including restored maintenance grants, coming to about £11 billion per year just for first degree students in English universities. As participation rates have risen to nearly 50 per cent, few countries, even in continental Europe, have been able to maintain completely free tuition, even if fees are generally much lower than they are in the UK.

Funding these costs entirely out of general taxation loads too much of the burden on non-graduate taxpayers. The argument that graduates should make some contribution to the costs of their higher education, from which they benefit financially, has generally been won.

A more equitable alternative would be to fund higher education out of an all-age graduate tax. In my new book on intergenerational inequality, I propose that all graduates in England earning more than £21,000, who received subsidised first-degree higher education in English universities, should contribute to the cost of their studies through an additional tax of about 2.5 per cent.

This would substantially reduce the average future repayments of young people who started their degrees after 2012, thus limiting their financial burdens through their thirties and forties when family finances are most stretched. Graduates on average earnings above £21,000 would pay back £812 per year, compared with the £2,025 per annum loan repayments for the same group today.

The graduate tax would raise an annual revenue of about £3.8 billion. This would require an annual taxpayer subsidy of about £8 billion, much the same cost as the current system. However, the graduate tax would represent immediate additional revenue for the government. It is currently paying the full cost of tuition fees by funding the loans issued by the Student Loans Company and  will not see the loans repaid for many years. 

Over the longer term, an all-age graduate tax would also generate increasing annual revenue. Even assuming that higher education participation rates soon peak, the proportion of graduates in the labour force will continue rising until 2067 when the current cohort of 18 year olds – with 48 per cent participation rates – reach retirement age. By this time, nearly half the labour force will be graduates and there would be some 50 per cent more graduate employees liable for the graduate tax than in 2017, with a proportionate increase in the revenue from the tax.  

At the same time, university costs could be controlled by the government restoring the cap on the numbers taking bachelor’s degrees. This would also encourage more investment and participation in high-quality, shorter technical degrees that may offer better job opportunities to the additional students in an expanding tertiary system. 

The most controversial part of the graduate tax proposal is the “all-age” element: the idea that all past graduates, as well as current and future students, should pay a small amount extra for the benefits that they derived from higher education. This will be unpopular with some, no doubt. But this element of the plan is essential to ease inequalities between the generations. 

The case for an all-age graduate tax has not previously been set out or evaluated. Now that we know the extent of the problems with our fees and loans policy, this would be a good time to debate it. It would place higher education funding on a much more stable foundation for the future, as well as making an important contribution to reducing intergenerational inequity. 

Andy Green is professor of comparative social science at the UCL Institute of Education. His book, The Crisis for Young People: Generational Inequalities in Education, Work, Housing and Welfare, is available on open access.