Wesley Stephenson is Producer of the excellent BBC Radio 4 programme, ‘More or Less’ (presented by Tim Hartford “The Undercover Economist”). The following article is a specially modified transcript of the programme, first broadcast on 10th December 2010. Our heartfelt thanks to Wesley and the ‘More or Less’ team for specially preparing this for OpinionPanel. To download a podcast or for more information go to bbc.co.uk/moreorless
The increase in the cap on undergraduate tuition fees caused students to take to the streets and protest, in some cases violently. But are the government’s proposals fair and progressive, or are they hanging a millstone around the neck of the nation’s young people, dropping them into a deep hole of debt? Or are they both? While passions are high on both sides of the debate, here at More Or Less on Radio 4 we couldn’t help feeling that the entire subject could do with a dose of numbers.
We know quite a lot about how this new scheme will work because in an act of kindness to number fiends like us, the Department for Business, Innovation and Skills put all their data on their website. Using this data we did some, admittedly crude, calculations based on a student borrowing £30,000 for their course – so this includes tuition fees and money for living expenses. We then looked at how much someone on various average salaries will end up paying back before the debt is written off in 30 years time. What is striking is that someone who earns on average below £35,000 will pay very little or anything at all. When you get to an average income of £50,000 you’ll still end up paying back less than half of what you borrowed. It’s only when you get to an average of £70,000 annual income that you end up paying back £30,000 – although even then, it’s not the full amount of the loan once you include interest.
While this is interesting, it’s important to understand that these figures are based on some big assumptions. For example, our model assumes that salaries rise by equal amounts each year, but in reality this doesn’t happen. To get a much more accurate picture of what could happen we turned to the Institute for Fiscal Studies who have modelled the new student fees using much more realistic assumptions of how much people earn. Lorraine Dearden who lead the work for the IFS and is also a professor of economics at the Institute of Education told me that;
“Around 50% of graduates, depending on the fee, will not pay back the loan. The higher the fee the higher the probability they won’t pay back the full value of the loan”
They estimate that graduates will pay back on average £25-30,000 in 2012 monetary terms, but some could be paying back as little as £5,000 although those earning the most could end up paying over £40,000.
This means that for most the new fees system acts like a graduate tax. Graduates will pay an extra 9% on all earnings over £21,000 for 30 years at which time any remaining debt will be written off.
Some graduates will even pay less than they do currently. The IFS calculates that around 22% of graduates will pay less than they would do today. This is partly because the threshold at which graduates have to start repaying loans is rising from an income of £15,000 to an income of £17,800 in today’s money. (The government states the threshold as £21,000, but that’s 2016 prices, not today’s prices.)
While this is good for that 22%, most graduates will pay substantially more than they do today. However, the government argue that students gain in monetary terms from having a degree – £100,000 on average. But this doesn’t tell the whole story. Professor Peter Sloan Emeritus, Professor at Swansea University has worked on a number of studies into the benefits of having a degree. He says that a male arts student for example earns an extra £22,000 over their lifetime – on average, this is about £500 more per year. While a male maths or computing student would expect an average lifetime earnings boost of around £220,000, or about £5,000 a year.
Of course graduates aren’t the only winners. The government also gains in the extra tax paid on these higher salaries. The Organisation for Economic Co-operation and Development calculates that once you’ve taken other factors into account, such as the amount they lose in tax while a student is at University, the government gains £45,000 from a male graduate and £40,000 from a female graduate over their lifetime.
Finally, is this tax progressive? “Progressive” means something quite specific; that richer people pay a higher percentage of their incomes. The answer is ‘yes’. There are two reasons for this. First, the more you earn the more you pay back, unlike the current system where students from a poorer background pay less, but middle income students and high earning students pay the same. Second, the graduate population tends to be from higher earning backgrounds and go on to earn more than those who don’t. While university education will still be funded in part by general taxation, the majority will come from graduates. To put the burden onto them rather than the general taxpaying population is almost certainly progressive.
There is of course one very large anomaly here – there are a huge number of people who have already benefitted from university education who now won’t have to pay as much in taxes as they would have done.