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UK: Graduate tax could work more effectively than tuition fees

graduate tax
It is unclear whether graduate tax would be a better system than tuition fees. Source: Shutterstock.

It is becoming widely accepted that the tuition fees system in the UK is broken.

Justine Greening, Former Secretary of State for Education, has warned of its collapse on more than one occasion, and most recently, this week.

In response to the floundering system, Former Labour Party MP Peter Hain wrote in an article for The BBCGraduate tax is a “fairer” way to finance university students.

His argument runs, the more graduates earn, the more tax they pay. And, quite crucially, they are not landed in thousands of pounds of debt.

During 2003 and 2004, a Labour-led UK government hiked tuition fees from the original £1,000 (US$1,400) per year to £3,000 (US$4,300). The idea of a graduate tax, supported by then-Chancellor Gordon Brown, was discussed at the time but discarded in favour of higher fees.

But, back in 2003, no one could have anticipated the Conservatives trebling UK tuition fees again to over £9,000 (US$12,800). Student debt in the UK now averages £60,000 (US$85,200) with interest rates driving it up every year.

As some would suggest, the British student finance system is failing. Student debt is wiped after 30 years. The majority of students are unable to ever pay off their entire debt in this time, with nearly half of students never paying any of their fees back, according to The BBC. And of the graduates who do begin paying their debt back, three-quarters won’t settle the full amount.

Now, with the Conservative party withdrawing grants for poorer students, the unpaid debt will creep ever higher.

Currently, when students leave university as fresh graduates, they begin repaying their debt only when they cross the salary threshold of £25,000 (US$35,500) per annum, which has just risen from £21,000 (US$29,800). However, the interest charges are hugely costly at over 6 percent with a base rate of 0.5 percent. Added to that is an effective marginal tax rate of over 40 percent.

Hain claimed the original idea was that fees “were a means of switching public spending from those with degrees who would have much higher earnings in adult life, to focus on early years’ education.”

The Labour party felt at the time that the public needed more funding into early years’ education “which is absolutely crucial to life opportunities”. However, the system is now on its way to collapsing.

Hain argued a graduate tax would “offer a more sustainable stream of revenue for the Treasury” thus pumping more money back into education in the UK.

It was estimated back in 2014 that by the midpoint of the century, when current student debt is written off, around £90 billion (US$128 billion) of the loans by the Treasury would be left unpaid.

A graduate tax, Hain argued, would mean graduates wouldn’t leave university penniless and in colossal amounts of debt. He claimed the debt adds to their difficulty to get on the housing market, another prominent problem for young people in the UK.

The tuition fees could be replaced with a payment added on to graduate’s income tax, much like the current system but with no expiration date and no heavy weight of debt.

HMRC would then collect the payments along with the rest of the UK’s tax instead of the student loans company. Hain argued this would not only be a simpler and more efficient system, but also that it would be “less costly than the current wasteful bureaucracy.”

However, not everyone has warmed to the idea.

The argument stands that a graduate tax is essentially doing the exact same thing as fees – taking a percentage of the graduate’s earnings per month – but further disadvantaging poorer grads.

But Hain claimed despite this argument, students from richer families “tend to go into higher earning jobs where they will more than pay back the fees they incurred.”

Other Twitter users have criticised the idea of graduate tax with claims it is no different to normal tax in that the rich pay more because they earn more.

Hain wrote: “A graduate tax is the fairest, most progressive way of dealing with the financing of university students because the more you earn, the more tax you will pay.”

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