David Kingman reports on a new idea from a leading right-of-centre think tank which calls for student loans to be replaced by a new financial arrangement that would give universities a direct financial stake in the future earnings of their graduates
The current student loans system in England is not working and should be replaced with a new arrangement under which universities would enter into private contracts with their students that guarantee them a share of their future earnings, according to a new report from the Institute of Economic Affairs, one of Britain’s leading right-of-centre think tanks.
The report, entitled Universities Challenged: funding higher education through a free-market ‘graduate tax’ sets out a vision which seeks to combine the best elements of a graduate tax with a free market in higher education, which the authors argue would lead to better outcomes for universities and students, while also lowering the burden on the taxpayer. However, critics have claimed that this option would be neither practical nor desirable in practice. So, could it work?
Better value for money?
The authors of the IEA report argue that the current English system is flawed because the structure of the repayments ensures that graduates who are closer to the middle of the income distribution are likely to pay back significantly more over the course of their careers than very high earners will, while low-earners can have so much of their debt ultimately written-off that it imposes huge burdens on the taxpayer.
They also criticise the current system because universities are rewarded on the basis of their ability to attract students, not on the future economic success of their alumni, so they face no direct incentive to ensure that the people they admit go on to have good careers.
The IEA propose to remedy this situation by replacing the system of government-backed student loans with individual contracts between universities and students which would guarantee the university a fixed share of the student’s income every year after they have graduated for a certain period of time. In effect, this would be just like a graduate tax, except that the money would go back to the universities directly rather than into a separate pot maintained by the Exchequer.
The report’s authors claim that this would incentivise universities to improve the standard of their teaching and careers advice, while also fostering innovation and saving the taxpayer money:
“Universities would be free to charge whatever they liked so that they could develop a wide range of courses, from advanced, high-cost courses that require significant contact time to low-cost online courses that can be completed quickly. There would be incentives to provide courses that were better value for money and which led to higher earnings potential under the graduate equity scheme, and universities would be free to develop such courses and take on as many students as they wished.”
The IEA’s report has been criticised by several commentators. One obvious problem with this type of funding scheme is that it could easily encourage universities to dramatically favour teaching the type of subjects that would be likely to generate the highest future returns for them – such as medicine, law and finance. Within a completely free-market environment of the type that the IEA envisages, something would have to be done to ensure that an adequate provision of the type of relatively low-paid graduates who are nevertheless vital to society continues to be maintained, such as those involved with nursing or social work.
Sally Hunt, general secretary of the University and College Union, emphasised this aspect of the proposals in her response to the BBC:
“The proposed levy would incentivise universities to offer courses with the highest financial returns, leading to a narrower range of subjects for study. This is bad for student choice and the resilience of our economy…we don’t believe that trying to squeeze more money out of students is the answer to the problem – graduates should not be viewed as cash cows for universities.”
Does your university matter?
There are also plenty of other arguments against the IEA’s proposals, not least that it throws the question of how much of an impact someone’s choice of university has on their career outcomes into extremely sharp relief (other factors are known to be very important, not least gender, ethnicity and socio-economic background, so safeguards would need to be implemented to prevent universities from discriminating during admissions).
Looking to the future, technology and the changing nature of the labour market are extremely influential factors in determining income levels that universities would have no control over. Back in the 1970s, a degree course in mathematics might not have seemed likely to produce too many big earners, but the subsequent revolutions in the financial industry and IT probably changed that completely.
It could also be pointed out that this scheme involves accepting an extremely narrow concept of the university as a sort of factory for churning out graduates, ignoring the many other functions they perform as centres of creative thought and intellectual vitality. If it led to the wholesale closure of departments and institutions which were judged to be of less economic importance, such as music, philosophy or the arts, society would almost certainly be the poorer for it, although in ways that are difficult to quantify in terms of pounds and pence.
Ultimately, the flaws that the IEA identifies with the current system of higher education funding in England mean that further changes look likely to be coming in the future; but the solution they propose seems unlikely to produce desirable outcomes for either students or the higher education sector as a whole.