Can't Someone Else Pay?

If I recall correctly "Can't someone else do it?" was Homer Simpson's election slogan some years ago. It seems to be the theme (with modification) that has underscored much of the recent discussion around university funding in the UK. Following the recent publication of the Browne Report, the government has outlined its plans for student finance starting in 2012/2013 and predictably it has prompted howls of dismay from many quarters in higher education and the media who want someone else to pay. These emotive, fact-free pieces of waffle from the Guardian and Telegraph are typical of the egocentric pleading that journalists like to indulge in, but there are also other special interest groups. If only they were numerate and could work through the actual effects of what they think they are talking about.

Simon Jenkins in the Times remarked recently that there are three kinds of conservative: ordinary conservatives, fanatical conservatives and universities. He was skeptical about the new regime and its ability to affect university life. Be that as it may, students' attitudes will probably change as a result of the new proposals. The changes affect tuition fees (not maintenance payments, as yet) which are to be allowed to rise to £7,000 per annum or in some cases £9000. This is just what the vice-chancellors wanted, but as usual it pays to be careful for what you wish for, since direct funding for teaching is to be cut drastically. Universities will have to cater more for the long term needs of their students and they don't much like it.

As a parent of two potential students, I have a personal interest in these developments and whereas, over the summer, I had forebodings about what was intended, now that I have had a chance to work through the proposals (insofar as they are known), I find that they cause me much less concern than I had supposed. Not only that, but they should cause little alarm to others either. The only uncertainty remaining now is whether the LibDems will support it and to what extent the proposals will be modified.

The first thing to understand about the proposed new student loan system is that it is not really a loan system at all, but a tax which is fair and progressive. It may be called a loan and the result may be called a debt, but this is like no other loan or debt that anyone ever had, since there is no obligation to it pay back. The essential fact is that the debt is accumulated at the rate of RPI+3% and after graduation is paid off at the marginal rate of 9% of gross income in excess of £21,000 per annum. The upshot of which is that the repayment schedule is not related to the size of the debt nor the interest charged. The proposals are really for a graduate tax with a finite life of 30 years.

Let us work through a few examples.

1) After graduating with first class honours in philosophy, Solon has a student debt of £30,000 and is out of work. He settles down in Peckham with graduate primary schoolteacher Sophia. Eventually, he lands his ideal job, sweeping the streets for £11,000 pa. He makes no repayments on his loan whatsoever. Sophia earns £27,000 pa and repays £45 per month (or about 2.5% of net salary) on her student debt of £35,000 which is about 5% of their rent. After thirty years of sweeping the streets and thinking his deep thoughts, Solon has still made no repayments and, under the rule, is now entirely free of his debt. He publishes his eccentric, semi-fictional magnum opus on the philosophy of frugality and urban cleansing to worldwide acclaim, earning a fortune as a cult author. Sophia is quite happy too, since she has only had to pay off around half of her initial debt and can now retire early with Solon to a luxury villa on Samos, where an occasional guest is

2) Croesus, an economics graduate who left university with £50,000 of student debt. He went to work in an investment bank and earned £100,000 a year. Initially, he repaid £592.50 per month (10% of net salary), about a quarter of his mortgage payments on his warehouse flat in Wapping. After seven years of rising salary his debt is paid off, although he was annoyed at one point that he could not use some of his annual bonus to discharge it in one go. Due to an economic crisis he is then made redundant and cannot pay the huge mortgage on his next property in Islington. He loses his home, his wife and his kids. During a spell on the streets he meets Solon who helps him to quit alcohol and turn his life around. He gets a job in the post room of a magazine publisher where he meets

3) Hypatia, who has a degree in physics and an inital student debt of £40,000. After failing to obtain academic or industrial work, she turns to science journalism and after a few years is earning on average £32,000 per annum. Her loan repayments are £82.50 per month (4% of net salary), about the same as she spends on her morning coffee and croissant at Costa Lotta. After thirty years she has only repaid 75% of her loan before it is written off. She and house-husband Croesus have one child and live in a two-up, two-down terraced house in Catford, the conveyancing for which was done by

4) Tully, who graduated in law with £35,000 of debt. He became a solicitor and after a few years is earning £50,000 per annum. He repays £217.50 per month (7% of net salary) and feels hard done by since it is nearly a third of what he pays on his mortgage on the three bedroom semi in Croydon that he shares with housewife Terentia and daughter Tullia. By his fiftieth birthday, he has paid off his debt in full, but Tullia's school fees are now a major drain on finances and Terentia has to work part time as a receptionist to help out. Fortunately, her salary of £18000 per annum means that she does not qualify for the honour of debt repayment, unlike her niece

5) Sappho, who graduated in English with a student debt of just £15,000, because her parents paid most of her fees and maintenance. She is really a poet, but earns most of her £25,000 a year from working in a municipal library and writing articles on the iniquities of student life for publications like Broken Society Weekly. She repays £30 per month (1.75% of net salary) on her student loan, which annoys her, as it costs as much as her daily Guardian/Observer and is 10% of the rent she pays to her parents for the use of their London flat in edgy Kensington. She never applies for more highly paid jobs, she says, as she would then have to make higher repayments on her loan and might end up paying it all off which, obviously, would just be further enriching the capitalist establishment.

The most obvious thing to note from these example is that the size of the "debt" upon graduation is fairly irrelevant to the rest of your financial life. The so called debt is a pseudo-debt which bears little relationship to actual debts that might be encountered in real life. However, the word "debt" immediately conjures up a whole host of worries for people, especially those with access to the media. They are worried about a number of things.

Firstly, they are worried that the humanities will die out. This is unlikely, since these course are the cheapest for universities to provide. Employers, rightly, value subjects like Classics, English, History, languages and Philosophy which have high intellectual standards. Secondly, they are worried that the sciences will die out. This, too, is unlikely because the government has indicated that it will pay extra for those courses which are intrinsically expensive to provide but of proven economic or social benefit. Thirdly, they are worried that the course in X-Factor Studies at the University of Bums-on-Seats might be axed. Well, they may have a point there.

The great cry of student youth to the older generation is You got your higher education for nothing, why can't someone else pay for ours? The charge levelled by journalists at the government is hypocrisy. That would be reasonable if it were true, but it isn't. The baby boomers mostly didn't go to university. Those that did, around 20%, were paid for by their parents' taxes, therefore they were brought up in less affluent homes and inherited less from them than they otherwise would have done. That was then, this is now, and participation in higher education is presently 45%. Perhaps it should be less. Inevitably, the baby boomers will transfer to their children what wealth they have, either through direct subsidy, tax or inheritance.

For those students who come from poor households they will get a maintenance grant which covers up to half of living costs. The rest will have to be borrowed, but it must be up to students to decide if it's worth it. In some cases, it won't be, in which case they must seek other opportunities and the universities which depend on their custom must change. In most cases, however, if the system is understood rightly, students will undertake their courses. The new repayment schedule is hardly onerous and only rises above 5% of net pay above a gross salary of £36,000 per annum. If you are single with no children, that income places you well above the 80th centile. If you are a couple with two children earning a similar amount each, you are still in that same net income bracket (which you share with many journalists) and way, way above any reasonable definition of middle income as I've indicated previously. Of course, you may choose to do some useful, but low paid job, like childcare or street sweeping because education isn't just a preparation for work but has intrinsic value too, in which case you will pay back only a very small part of your loan or possibly none at all.

In terms of income distribution, it is likely that those with a gross salary of around £50,000 will feel the effect most since they will be paying off the debt at the marginal rate of 7%, around £220 per month. These people feel themselves to be "middle income" because, often overmortgaged, they do not have large monthly surpluses. In fact, the repayments will depress their ability to take on high mortgages and the effect of this will be to dampen house price inflation. No bad thing. Yet, of course, such earners are not middle income at all: they are in the top 10% of all earners. As members of the "Not Quite Well Enough Off Club" they will feel aggrieved because really high earners in the top 5% will not only be paying the loan back in full, like them, but sooner and hence more cheaply. This is indeed true, but that is just one of the many advantages of being rich and it can hardly be expected that one specific financial measure should be itself redistributive. The way to deal with this is through general taxation.

Higher education, which is voluntary, has to be paid for somehow. In the proposed new system, those who undertake and prosper by it will pay the most. Those who undertake it and do not prosper will pay little. Those who do not undertake it will pay nothing. What's not to like? Relax everyone, it will work out.