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Graduate Tax or Loans

June 16, 2011

There’s a lot released today about HE including the UCU survey on attitudes to for-profits amongst senior academics and HEFCE’s mock kis.

This though makes me angry and baffled: THE again. Willetts seems to want to start talking about a tax rather than a loan:

Mr Willetts said that although the system of income-contingent loans repaid by graduates bore little resemblance to credit-card debt, advertising agencies had warned the coalition against avoiding language that had become “ubiquitous”.

“Their advice was…if you don’t use the language of fees and loans, it looks like a bunch of shifty politicians who are not willing to use the same language everyone else uses,” Mr Willetts said.

This is more shiftyness.  He’s right that what’s proposed is better able to claw money back from EU students, but that’s because it is a loan-scheme. 

They came up with a complicated system (and the last post on recruitment caps perhaps indicates that nothing is getting any simpler – more administrators!), made it more complicated because of political exigency (last minute concession to LibDems on repayment thresholds), and now they quibble over how to discuss it. 

For an individual trying to understand how it might impact financially on money in pocket in the early stages after graduation, there is some value in saying, ‘It’s a bit like a 9% tax on graduates earning over 21 000.”  Though it’s then a tax that stops at some point and the difficulty comes in working out when that will be.  It also lacks the ‘democratic’ elements of taxes:  it’s a loan because it can be sold off to third-parties, and because it’s an income-dependent loan, it’s inherently volatile – it is very difficult to predict how long it will take to pay it back the outstanding debt once repayments start or how much will be paid over the thirty years of repayment before whatever’s left is cancelled. And unlike credit card debt, you can’t elect to vary how much you pay back (the government is proposing to consult on early repayment – whether to make it possible and, if so, what penalty to impose).

You can see my discussion here with Martin Lewis and his financial advisory website about the assumptions in his guide. Martin seems to think that in a few years’ time with may see different thresholds and interest rates operating depending on when the loans were taken out: no tax operates like this. I have elsewhere criticised the widely-publicised ‘BBC figures’ for assuming wage inflation at 4% and RPI at 2% over the next 30 years.

And, yes, I did build my own model of the student finance proposals and I decided not to make it public, since the only conclusions I could draw from it were that the loan outlay is large and the scheme volatile (small, difficult to predict changes to the variables – RPI and wage inflation – have large impacts). 

If anyone has more knowledge of income-contingent repayment loans, I’d be very interested to hear.  Once the size of the scheme goes over a certain level, it becomes difficult to manage for individuals and underwriters, as far as I can tell.

p.s. The government has effected as much of its plans as possible using existing statutory instruments and legislative powers: e.g. raising the tuition fee caps and imposing additional information requirements from universities through extending HEFCE and QAA powers.  ‘Loans’ should be seen in this context of expediency – see Part 8 of the Education Bill for the manner in which it is more convenient to use the existing loan structures to implement the new scheme which will not be enacted as legislation.

  1. This is a helpful post, but I think it does emphasise how tax-like the loan system will be, even though it isn’t a tax. Government is accustomed to a lot of uncertainty about future tax revenues, and we are accustomed to a lot of uncertainty about our future tax outlays (given that we know neither our future income, nor the prevailing future tax rate), so even long after graduation it is still much like a tax.
    I agree with you that loans on this basis will be very difficult to sell off. Tax farming went out of fashion in the eighteenth century because the farmers required such large incentives to take the risks involved, and tax farming rarely involved 30-year periods.

    • Yes – the problem of writing a bit too quickly. On reflection, whether the government is talking about ‘loans’ or ‘tax’ tells us about the intentions of its administration but there is a great deal of mispresentation from Willetts if this has been reported accurately. He knows why he elected for a loan scheme – it wasn’t because of PR pressure.

      My worry is that the proposed removal of student loan interest rate protections in the legislation by the 2011 Education Bill is very much a part of the government’s intentions to treat it as a loan – allowing third parties to charge commerical interest rates, or higher in certain circumstances, is a response to the difficulty the government’s had in selling off the post-98 loans. There are other reasons why the government didn’t want a tax – not least the maintenance of a pricing mechanism through fees to encourage differentiation within the sector- and to avoid ‘overtaxing’ the wealthy.

Trackbacks & Pingbacks

  1. David Willetts and the friendly bankers « University For Strategic Optimism
  2. Two points about Martin Lewis’s recent posts on student loans « Critical Education

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