Opinion: The truth about the graduate contribution

There is a real danger that many prospective students will be put off from going to university due to the confusion, half-truths and lies, often left unchallenged, relating to the new system of university funding and graduate contributions.

A bright light which breaks through the fog can be found over at MoneySavingExpert.com, where Martin Lewis pares things back to the bare facts. His Student Loans Guide 2012 makes the following key points:

  • Existing students stay on the old system of loans
  • Students don’t pay anything up front
  • Graduates will pay back £540 per year less than they do under the current system – graduates will have more money in their pocket each month
  • Graduates who earn less than £21,000 don’t pay back anything
  • Graduates will owe more and be in debt longer but this debt will not affect credit ratings
  • People shouldn’t think of the new system as a loan but as a graduate tax
  • The rules may be different for students in Scotland and Wales
  • Most people will never pay back all of this debt as the debt is wiped out after 30 years

A graduate tax: the very thing that the NUS has been calling for. It is a crying shame that the NUS has decided to be political over the new changes rather than do the right thing by the people it professes to represent.

I would be extremely disappointed if there is a single person put off going to university due to the spin put on the changes by the NUS. Let’s hope that as many prospective students as possible find their way to MoneySavingExpert.com where they can actually get some honest expert advice on what to expect when they take up their courses in 2012.

Editor’s note: You can also watch a video of Martin Lewis explaining student funding from 2012 on YouTube:

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19 Comments

  • Liberal Neil 29th Jun '11 - 2:30pm

    I fully agree that prospective students need to be given clear and balanced information about how the system actually works. We do not want to see talented youngsters put off from applying for university because of misunderstanding the actual system.

    However, if we are going to take the moral high ground we have to be careful how we describe things to. A tax is open ended, this isn’t, so whilst Martin may get away with saying that people should ‘think of it’ as a graduate tax, we shouldn’t pretend that it is the same thing.

  • Chris Riley 29th Jun '11 - 2:55pm

    Craig, you’re obviously a bit out of touch as some in the sector has raised significant concerns about the data Martin uses.

    Or, to put it bluntly, Martin’s got some of his facts wrong (not purposely, I might add).

    You also neglected that in the 30 years between a new graduate starting the loan and them being expected to repay it, there is exactly no guarantee that any one of the likely 6 Governments in that period (or whichever private providers they might bring in to administer the system) will not renegotiate the terms.

    Also, the reality is that many, and possibly most graduates will not even repay the *interest* on the debt, with the corresponding issues for the public finance that this would cause. This means that I would be very surprised indeed if the terms were not ‘renegotiated’ at some point.

    Anyone scoffing at this ought to have a word with any holders of public sector pensions about what happens when the Government decides that a financial deal it has made with its citizens no longer suits it. You can even practise the arguments, and perhaps hold a sweepstake as to when they’ll be made as an excuse to up graduate contributions.

    I say 2020, when the Tories next win an election.

  • Chris Riley 29th Jun '11 - 2:57pm

    Sorry, must stress that the issues I raised are those Martin Lewis (who is acting in good faith and has a real desire to help prospective students) has not really brought up. There are a couple of others, but they’re extremely technical and they may not make a real difference to the broad thrust of his arguments.

  • Craig Brown 29th Jun '11 - 3:36pm

    Hi Chris

    Thanks for the comments. I would be really interested to read up about some of the significant concerns relating to the figures Martin has used to compile his advice, so if you could pop a link into a comment post, that would be great. The most important thing, as I can see, is that students get the best advice that we can give. If there are doubts then I would like to know what they are rather than just know that doubts exist.

    Your points about what future governments do with regard to the way in which university tuition is funded are clearly valid as none of us have a crystal ball. The guide is unambiguously for students starting in 2012, however, and the points that Martin makes still stand for those students (to the best of my knowledge). Should the terms be changed, they would probably not affect students who start in 2012, just those students starting AFTER the new system is introduced – in the same way as the new system being brought in in 2012 will not affect those students who started their courses in 2011.

  • “It is a crying shame that the NUS has decided to be political over the new changes rather than do the right thing by the people it professes to represent.”

    It’s actually a crying shame that the NUS had to highlight Lib Dem MP’s who decided to renege on their signed pledge.

  • •Graduates will owe more and be in debt longer but this debt will not affect credit ratings

    It may not affect their credit rating but will affect their ability to save and thus do anything useful with their unaffected credit rating – thanks.

    •Graduates will pay back £540 per year less than they do under the current system – graduates will have more money in their pocket each month

    Only for the period at which they would be paying it back – say 5 years. Under the old system their debt would then have been paid off so now they will be more per month for the following 25 years. this goes against the previous point which states that they will owe more. In the end its how you measure it – pay less for a short period, but pay more for a longer period.

  • I have previously pointed out to Martin Lewis that this guide is incorrect and misleading in stating that the tuition fee system is equivalent to a graduate tax. He has not seen fit to address my concerns.

    This is a very important point and the spin and deliberate distortions put out by the coalition (that have been repeated by Lewis) need to be challenged. The tuition fee system is fiscally regressive – students that go on to earn a higher lifetime salary will pay less money and also a smaller proportion of their income (the definition of tax progressivity/regressivity). Tuition fees are regressive across the top four to five income deciles (altough Clegg likes to cherry pick the very narrow income band across which they are progressive to say how wonderful they are).

    The reason this is so important is because (a) Lib Dem policy is the exact opposite – i.e. that HE should be funded through progressive taxation and (b) the NUS’s proposals are to fund HE through a progressive graduate tax.

    The coalition explicitly rejected a graduate tax (that would be at least proportional) in favour of tuition fees because they were concerned that high income earning graduates would leave the Country after they graduated. Instead they opted for regressive tuition fees that hit middle income earning graduates the hardest, with the obvious implication that the coalition is less concerned about middle income earning graduates leaving the Country after graduation.

    “A graduate tax: the very thing that the NUS has been calling for. It is a crying shame that the NUS has decided to be political over the new changes rather than do the right thing by the people it professes to represent.”

    It is important that this deliberate distortion of reality is countered with the facts.

  • Go to University and pay 40% as a lower rate tax payer for 30 years for an un-repayable debt. (20% tax+ 11%NI + 9% student loan)

    Spin it how you like £27k debt rising by RPI+3% is in no possible way better than £9k repaid at a much lower interest rate.

  • Craig Brown 29th Jun '11 - 9:21pm

    Steve
    Again, what you are saying just isn’t backed up by the reading I’ve done around the subject. You say that there are major differences between the new system and a graduate tax and you are right, there are some, but from my understanding those differences make the new system better, not worse. A graduate tax is paid forever, wheras the new system caps the repayments at the point you pay back what you owe or after 30 years, whichever is soonest.

    The research I’ve seen conducted such as by the IFS here http://www.ifs.org.uk/publications/5366 , here herehttp://www.ifs.org.uk/publications/5342 and here http://www.ifs.org.uk/publications/5307 agree that the new system is a PROGRESSIVE form of graduate tax, not regressive. Complicated, yes, but not regressive. It is progressive because higher rates of interest are applied to people who earn larger salaries and there are likely to be penalties for people who wish to pay it off sooner.

    Also, just to add something in relation to the point Simon raised about saving, if you have £540 per year more in your pocket when compared to current repayment scheme, then that, surely, is £540 a year more that you can save?

  • dom hannigan 29th Jun '11 - 10:07pm

    Chris – who within the sector have raised concerns about what martin is saying? who, when, where and how?

    Dominic Hannigan
    (Employed within the sector )

  • @Craig Brown
    “Again, what you are saying just isn’t backed up by the reading I’ve done around the subject.”

    It doesn’t matter how much reading you do, what matters is the evidence. Tuition fees are regressive across the top four to five income deciles, i.e. the proportion of income someone pays decreases as a proportion of the tax base, i.e. income. It’s quite clear that you do not understand what progressive/proportionate/regressive taxation actually is, so I would welcome if it if you do not proceed to lecture me. Putting PROGRESSIVE in capitals doesn’t win the argument.

    “It is progressive because higher rates of interest are applied to people who earn larger salaries and there are likely to be penalties for people who wish to pay it off sooner.”

    That is not the definition of progressive taxation. I urge you to read a GCSE economics textbook.

    If you look at the end of section 17 of Martin Lewis’s ‘facts’ on tuition fees, you will see a plot of total repayment for different annual salaries. You will see that the total amount drops with increasing earnings above a certain amount. When the total amount repaid is then compared to earnings as a percentage (the definition of tax progressivity), it becomes obvious (to anyone that can add up) that tuition fees become regressive above graduate middle incomes.

    The IFS report you quoted does not refer to tuition fees as being progressive/regressive in absolute terms; it refers to tuition fees in comparison to the previous tuition fee system. In absolute terms, tuition fees are regressive above middle incomes – a fact that is indisputable and is in complete contradiction to the Lib Dem policy of funding HE through progressive taxation and the NUS proposal for funding HE through a progressive graduate tax.

    It requires an enormous amount of Orwellian double-speak, and a lack of either a conscience or awareness, to say that the new system is fairer.

  • Craig Brown seems to be pretty much right on this issue. I think one of the problem’s is that this has become political and certain people are trying to make claims for political ends, rather than informing students or pointing out genuine problems with the policy.

    Of course people pay for longer, but if we scrapped tuition fees then we’d be paying more in tax so I don’t really see the difference.

    I think the Liberal Democrats do need to apologise for breaking the pledges. It would be good to confront the issue head on via a public service broadcast maybe. It would cost money that we don’t neccessarily have growing on trees but it may do more to regain respect from voters than ignoring the issue.

  • As a LibDem voter I consider it unworthy of the Lib Dems to blame the NUS for the graduate fees “thing”. If young people are put off university because of the fees tripling it will he the fault of the Liberal Democratics and Conservatives and not that of the National Union of Students. Accept resposibility for your action.

  • Craig Brown 1st Jul '11 - 10:04pm

    Steve
    I’m afraid that your argument is more about semantics than anything else. If someone is purchasing an item and it is decided that the cost of that item should be more expensive for someone with a higher income and less expensive for someone on a lower income, if this was to be done by percentage rather than real amount, then the top earners would have to pay way beyond the value of the item.

    For example, if we say a degree should cost a third of your annual salary a year, then for someone earning £27k they would pay 9k a year. Now say there is a footballer in the premiership who happened to have a degree in, say, rocket science, but decided that he would be better off playing football. This footballer would earn about £676000 a year, based on 2006 figures. For loan repayments to be progressive in your definition, he would have to repay more than £225333 a year for his degree. Even if his job bears no relation to his degree whatsoever. This is absurd, clearly, but I hope it demonstrates why, when talking about a degree it makes no sense to define ‘progressive’ as a percentage of income.

    Lets remove the word from progressive, if you don’t think it applies. Lets use the word fair instead. If someone on a low income has done a degree and doesn’t pay back a penny of it over their lifetime, a middle income earner ends up paying perhaps 1.5 times the cost of the degree back and a high earner ends up paying 3 times the cost of their degree back, then this in my eyes if fair. It’s certainly fairer than the current system where the amount you repay has zero bearing on the amount you earn.

  • Craig Brown 1st Jul '11 - 10:12pm

    @DaveGN
    The NUS is very much at fault for having played party politics over tuition fees. This was never more evident than when The Times got hold of the leaked memo from Aaron Porter, then NUS leader, to other NUS officers.

    http://liberalconspiracy.org/2011/02/17/leaked-nus-memo-calls-education-reforms-progressive/

    It was clear that Aaron was saying in public how terrible the new reforms are yet behind closed doors he was saying a very different thing. What the NUS really thought about the new system was that it was fairer and more progressive than the current one, and also stated that it had over egged what it was saying publicly about the depth of university funding cuts.

    The NUS has every right to be political when it comes to supporting its members and prospective members. It is not right for the NUS to be PARTY political at the possible detriment of its membership. New students who are not aware of the political connections of the NUS to the Labour Party are looking to the NUS for independent advice. This, sadly, was never forthcoming and they should be called out for what they’ve done over this issue.

  • Jonathan Hunt 2nd Jul '11 - 12:23am

    Surely the information everyone involved in this debate requires is a simple answer to a difficult question: How much is a student likely to earn by spending three years at uni, sacrificing three years salary and often working very hard to obtain a good degree? Is it worth the investment of time and money?

    If you believe the Browne Report you would be likety to earn an additional £100,000 — or just fifty quid a week over a 40-year working life. Other estimes vary, with some saying as much as a million. At that level, that early investment is obviously justified, and so too is repaying tuition fees of up to £27,000 plus the cost of maintaining yourself over that period.

    At what point does it become economic in straight financial terms.

    And when, if at all, can it be justified to ask non-graduates who will earn much less than you to contribute to your university education?

  • @Jonathan Hunt
    “And when, if at all, can it be justified to ask non-graduates who will earn much less than you to contribute to your university education?”

    Please think about it. If the average graduate earns over 100k over their lifetime then they also pay at least an addiitional 50k in taxes during their lifetime. That more than the cost of the tuition in itself, before we even take into consideration the tuition fees. To say that non-graduates contribute for a graduates university education is a complete falsehood. It’s the kind of rhetoric that the Tories would use to whip up support amongst the ignorant.

  • @Jonathan Hunt. I agree with your analysis. But big questions like “when, if at all, can it be justified to ask non-graduates who will earn much less than you to contribute to your university education?” should have been settled by all the political parties well before the general election. The LibDems are agonising over the fundimentals which were supposed to have been agreed upon by the party two years ago.

  • @Craig Brown
    “For loan repayments to be progressive in your definition”

    It is not my definition. It the definition used by every economist in the world and that is written in every economics textbook in the world. I learnt it when I was 14. Did you leave school before that age?

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