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The Winners and Losers of the Graduate Tax in the UK

Record numbers of students are going to English universities as a result of the government’s initiative to get more students into universities. Consequently many are facing financial challenges and funding has become an issue. This is presently being addressed by the UK Government who has asked Lord Browne (ex CEO of BP) to undertake a comprehensive review.

Lord Browne has been tasked with the University funding review and will deliver the review later in the autumn of 2010. The report will highlight whether the current system of tuition fees will remain as the preferred model, or he will make recommendations for a graduate tax scheme. There are both winners and losers if the new graduate tax is to be recommended by Lord Browne.

The National Union of Students (NUS) is in favour of the implementation of a graduate tax and wants the abolishing of tuition fees altogether. The NUS believes that the new tax scheme would yield £6.4 billion in revenue over a 20 year period. If existing tuition fees were raised to £5000 per annum, the treasury would only yield £6 billion over the same time period.

 

Universities on the other hand, are currently lobbying the government and want the tuition fees model stay. Universities also want the autonomy to increase tuition fees as they wish or as much as £5000. The NUS believes that if Universities were given the freedom to lift the cap, many students from poorer backgrounds would be excluded from studying at elite universities such as Oxford and Cambridge Universities

College Student Loans

Under the current system, universities in England have capped tuition fees at £3,225 per annum. Many students have taken loans out to pay tuition fees and these loans have been taken from the Student Loans Company which is a non-departmental public body of the UK government. SLC undertakes the administration of awards after the award authority undertakes the initial assessment.

In the academic year 2009/10, the SLC made a provisional amount of support (as of November 2009) of £6238m to English domiciled students studying in the UK and EU students studying in England. Through the Student Loans Company, students can obtain financial assistance through loans depending on their circumstances, where the student lives and on the type of courses undertaken at University.

The loans are means tested and loan repayments begin when the student leaves university and starts earning more than £15,000 per annum. Payments take place in instalments which include interest through a system called Income-Contingent Repayment (ICR).

What is a Graduate Tax?

The UK government is currently considering replacing student tuition fees with a new graduate tax scheme which would see the present annual tuition fee of £3,225 to be scrapped completely. Instead under the graduate tax scheme, students would contribute between 0.3% and 2.5% of their monthly salary to a national trust. These contributions would be made over a period of 20 years and contributions would be deducted at source and deductions would be shown on the pay slip.

Contributions would be dependent on the graduate’s salary and contributions would be made accordingly. For example, a graduate earning £40,000 per annum would make monthly contributions of £120 a month, whilst a graduate earning £15,000 per annum would pay £5 a month. The money would go into the trust which would be independent of the government and funds would be distributed through the Higher Education Council for England (Hefce)

Features of the Graduate Tax System

The following are the main features of the Graduate Tax system:

  • Money is paid back after graduation
  • Earning threshold is £15,000 per annum
  • Repayment is 9% of earnings over £15,000
  • 25% of the loan is subject to means test
  • Loans are available depending on where the student plans to study
  • Inflation will mean that the student only pays back what s/he owe

There are both potential winners and losers of the new Graduate Tax System

Potential Winners of the Graduate Tax

According to the NUS, the new tax system favours students for the following main reasons:

  • Fairer system for graduates on different pay scales, especially graduates on low salaries
  • Students would be taxed based on the course and the number of credits achieved
  • Students would be able to move in and out of studies and between full time and part time studies with greater flexibility
  • Employers can make voluntary payments on behalf of the student

Potential Losers of the Graduate Tax

Universities on the other hand argue that the graduate tax creates many administrative challenges especially if the student leaves the UK after completing studies. Additionally, universities will not get to keep the income generated from the university students. Instead, all the funds will go into one fund and distributed by the People’s Trust for Higher Education.

The new graduate tax could potentially lead to many challenges for stakeholders, but this will become more apparent when the Lord Browne will deliver his University Funding review in the autumn of 2010.