Tim Leunig writes: The problem with Labour’s proposed tuition fees cap

Ed Miliband has seized the initiative at the start of his conference, announcing that Labour would cap student fees at £6,000 per year. This policy is superficially attractive, and is clearly designed to win over LibDem supporters who remain angry at the rise in tuition fees.

Today I have published an analysis of Labour’s proposal. It uses the Business Innovation and Skills graduate income “ready reckoner”, which is based on data from the ONS Labour Force Survey. The underlying data are as good as they can be, although of course predicting graduate incomes in 30 years time is a dangerous game.

The results are stark. The biggest winner is the government, because it will have to write off fewer outstanding debts after 30 years. The reality is that for most borrowers the current scheme is already a graduate tax irrespective of whether the headline fee is £9,000 or £6,000. They simply won’t earn enough to pay the loan off, whether the headline fee is £6,000 or £9,000. Cutting the fee cap from £9,000 to £6,000 will not alter their monthly or lifetime repayments.

Some graduates do gain: notably those who earn enough to pay off their loans in full. Our analysis shows that over half of the gain to graduates goes to the richest 20% of graduate – those who earn more than £2m in the 35 years after graduation. The typical beneficiary is 50 years old and earns £72,500 at the time when they benefit from Labour’s proposal.

In contrast young graduates get very little benefit – under 1% of those within 10 years of graduation will gain.

Labour have said that they will levy a higher rate of interest on those earning £65,000 or more. This will raise very little – people earning this amount have often paid off their student loan already, simply because they have had reasonably high earnings earlier in their career. Earnings at this level are most common late in people’s careers – the average outstanding student loan for these people at that point is less than £4,000. An interest rate surcharge will simply lead them to pay the debt off immediately.

Finally, Labour will pay for the change by scrapping the fall in corporation tax on banks. This means that money will be taken out of the economy now (though higher taxes on banks) and put back into the economy in 25 years time (when some graduates will pay less in repayments). In today’s economic climate it makes no sense to take money out of the economy like this.

Tim Leunig is Chief Economist at CentreForum. You can read Centre Forum’s analysis of Labour’s proposed £6,000 undergraduate degree cap here (PDF).

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15 Comments

  • Correct me if I’m wrong, but by restoring state funding for higher education Labour have plugged the massive funding gap which exists in the Coalition’s plans?

    You openly admit that most people won’t pay back enough money to cover their fees under your plans, where will this money come from? Are you going to increase repayment rates? Lower repayment thresholds? Pass the buck to future governments? Or just shut down large parts of the HE sector?

  • Grammar Police 27th Sep '11 - 9:48am

    Jon is exactly right on this; even if they increase interest rates for higher earners (which the coalition plans will also do), it still won’t improve the lot of lower and middle earning graduates, who are unlikely to pay back the full amount, whether the fees are £6K or £9K (even less likely given that many students will take maintenance loans too).

    This isn’t a policy, it’s a headline, and what annoys me the most is that it’s pure Labour cynicism, intended to bamboozle the public, who think that Labour are doing something progressive, when actually they’re doing the opposite.

    Martin Lewis on MoneySavingExpert.com was discussing whether £6K fees actually made a difference earlier this year, and his conclusion was that it made no real difference to all but those who go on to take the highest salaries.

  • The real problem is that all three main parties are now committed to a marketisation of higher education that will retrench privilege and drive down standards. It really is quite remarkable how quickly the Coalition set about breaking the one of the few things in Britain that actually works. And amidst this cosy consensus the poor voter will have zero say in the matter at the next election. I suppose, though, that will be an improvement on the last election where they were given the illusion of choice by cynical Lib Dem politicians without a neutrino of integrity between them.

  • An interesting analysis, but the lack of properly quantitative and labelled x-axes on the graphs reduces the article’s credibility. Could you please edit it so that we’re shown exactly what the projected lifetime incomes are on the first chart and the number of years since graduation on the second.

  • The second graph has gone wrong between my computer and this posting – I will send in another! The bars in the first graph are graduate income deciles – lowest earning 10% of grads on left, highest 10% on right. (technical note: lifetime is the net present value of earnings in 35 yrs after graduation.

  • Tim Leunig

    When I was 14 years old, I learnt the definition of progressive/proportional/regressive taxation in GCSE economics. Where did you learn your definition — I;ve never seen it in a textbook? Just because the nominal amount of gross payments increase with income deciles (actually they don’t according to the analysis on MSE’s page – why are your ‘results’ so very different?) does not mean the payments are ‘progressive’.

    Can you please explain why all the students in your analysis are maxing out on £5500 maintenance allowances? The effect of this inclusion has a profound effect on the regressivity of tuition fees (tuition fees are regressive above graduate middle incomes) and distorts the number of graduates that are better off as a result of a £6k cap, It is perfectly possible for students to go through university without borrowing for maintenance, let alone borrowing a stupendously large £5500 per annum (especially those from poor backgrounds who are eligible for maintenance grants in addition to the income from part-time jobs, etc).

    If you remove or substantially lower the maintenance grants in you analysis then you will find that there will be a good proportion of graduates on middle incomes that benefit froma £6k cap.

    AndrewR
    “The real problem is that all three main parties are now committed to a marketisation of higher education that will retrench privilege and drive down standards. It really is quite remarkable how quickly the Coalition set about breaking the one of the few things in Britain that actually works. ”

    Quite. Labour’s plans amount to nothing more than polishing a piece of excrement (even if it does make things slightly less bad).

  • If we want to be radical why not simply say that if you borrow £27,000 that is what you pay back.

    Then everyone has to make a contribution even if they do not get beyond the £21,000 limit.

    As a graduate Methodist minister I have yet to earn £21,000 in my life, but fortunately I did my degree in the days before tution fees.

  • Tim,
    ‘ the current scheme is already a graduate tax’

    Have we adopted the tory definintion of tax? ie the rich don’t pay it? If not stop refering to the loans as a graduate tax, they are not a graduate tax as the graduates of rich parents will not pay as their fees will have been paid upfront.

    The loans are simple a way to get the working class paying for the education of the working class and putting a 50k barrier of debt between them and their fellow graduates from middle class families.

  • Steve – can you send me a link to MSE’s page – then I can answer ([email protected]). I assumed that people would borrow for both fees and maintenance because SLC report that that is what most people do. Insofar as we have evidence, those who take smaller loans are from richer backgrounds, and I am less interested in the effect on people with affluent parents, able to support them.

    Dave – I said “The reality is that for most borrowers the current scheme is already a graduate tax “. I didn’t say it was a grad tax per se – because it isn’t, for the reasons you outline!

    Philip – surely we would bankrupt you if we followed your proposal?

  • philip wren 3rd Oct '11 - 9:49am

    Tim, not if £27,000 was paid back over 30 years. In some years it would be tough, but I’d value the degree all the more.

    In my more cynical moments I also wonder if the govt is not using tution fees to cull both the number of universities and not quite good enough courses by using a market force? If students know that they will have to pay 9k whether they go to a prestigous university or one that’s reputation is not so good, will they decide that the not so good universities, running questionable courses, will find applicants numbers drop?

    The result would be fewer (merging?) universities, people not undertaking courses of questionable value, but with no blame being directly attached to the government?

    In the long run the number of university places will shrink.

    Unless, of course, the universities whose graduates get well paid work are able to expand or the failing universities get their act together and provide high quality courses that students want? Perhaps they might even revert to the equivalent of the HND and HNC of my day?

  • philip wren 3rd Oct '11 - 9:53am

    If students know that they will have to pay 9k whether they go to a prestigous university or one that’s reputation is not so good, will they decide that the not so good universities, running questionable courses, will find applicants numbers drop?

    sorry it should read, are not providing enough value to make undertaking the course worthwhile?

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