Lifetime Learning

There are a number of irritating features in Gaby Hinsliff's Guardian article on student debt. The first is the framing of a "generational injustice", which plays to the idea that the young are getting a raw deal. This ignores that many young people don't have any student debt, because they never went to college, and nor did many older people. In other words, the issue relates to the difference in treatment of the 38% who currently go on to tertiary education and the 15% of the older cohorts that did so by the early 1990s. The second irritation is the claim that what we now have is a "stealth tax", which is correct only in the limited sense that the Chancellor has frozen the income threshold for repayments (i.e. a form of fiscal drag). It also ignores that graduates may eventually have their debt wiped out, which is not a privilege HMRC extends to other taxes, stealthy or otherwise. The reason why the issue is causing so much angst among the press is precisely because it is seen as an added tax on the non-wealthy middle-classes. Rachel Reeves' comment that it's "not right that people who don’t go to university are having to bear all the cost for others to do so" makes this clear from a (traditional) working class perspective.

As a good centrist, Hinsliff cannot resist the temptation to berate the irresponsible left in passing. Thus she notes that "Last week, the Green party leader, Zack Polanski, called for “a conversation about student debt forgiveness”, echoing a rallying cry among young Democrat voters at the last US election for loans to be written off faster (though he didn’t explain where he would find the billions that would cost)". I'm going to go out on a limb and suggest that Polanski didn't bother to explicitly state where the billions would come from because they can only come from taxation. Hinsliff could probably work this out for herself. The "magic money tree" of borrowing against futrure prosperity is not relevant here, despite the routine trope of further education as an investment and the youth of today as tomorrow's fiscal infrastructure. Like state pensions, state education is paid for by current workers (the Chancellor's point). The student loan scheme is anomalous not because it seeks repayment from the beneficiaries, rather than funding the cost out of general taxation, but because it expects future workers to pay for historic costs. Beneath the wails about injustice, you can spot the traditional conservative argument about not "saddling" future generations with debt. 

Hinsliff notes that graduates may face a marginal tax rate of 49% when even the highest rate of income tax is currently only 45%. As she puts it, "why are young people being squeezed proportionately harder in some cases than their bosses?" But it's no secret that the poorer you are the higher the total tax burden, when you include VAT, Council Tax and other indirect taxes. And it's also no secret that the rich can avoid paying the headline rates of income tax by converting income to dividends or capital gains. The Guardian, like other newspapers, has had to tread a fine line here: emphasising the "injustice" without admitting that it is one among many that currently characterise the UK tax system and arguably nowhere near the worst. Hinsliff suggests that "The fairest option is probably to cap how much any student should have to pay over their lifetime, so that loans bear some resemblance to what was borrowed rather than just morphing into a kind of stealth graduate tax." But she immediately dismisses this on grounds of expense, i.e. lower tax revenues, indicating that fiscal rigour still matters more to centrists than social justice. The discussion should really be about how we shift the tax burden onto those who currently pay proportionately less.

So who would those others be? Back in 2012, I noted that the proposed changes to increase the qualifying age for the state pension would be regressive because of variations in longevity (and thus years enjoying a state pension) across socio-economic groups. On average, the richer you are, the more state pension you will get in cumulative terms, regardless of lifetime contributions. A few months later, I suggested that the worries about a lack of skilled employees could be alleviated by applying differential state pension ages based on further education. In simple terms, if you left school at 16, you'd retire at 65; if you left at 18, you'd retire at 67; and if you went on to do a 3-year degree course, you'd retire at 70. This would skew the composition of the working population towards the skilled, which is helpful if you consider the adverse trend in the dependency ratio (the number working who must support those not working). As there would be nothing to stop anyone saving into a private pension, the rich might still retire at 65 or even earlier, but in aggregate across the economy we should see a staggering of retirement dates in line with education.

The moral (or "justice") case for differential state pension ages based on educational attainment is that people who started work at 16 are likely to die an average 5 years earlier than people who started work at 21. This is both a reflection of a person's socio-economic class origins and the greater likelihood that an earlier start in the workplace will have led to a liftetime of manual or routine labour and consequently greater health issues (the result of physically demanding labour, unhealthy workplaces and the long-running effects of income inequality). The fiscal case is that while manual labour is difficult to maintain into your 60s, cognitive or other skilled work is much easier. In terms of productivity, there is no significant falling off and this is reflected in a lower likelihood of a rapid downturn in earnings in the final decade of work, and thus taxes paid. As cognitive and skilled work broadly correlates with educational attainment, it makes sense to defer state pensions for that healthier, more productive and higher-earning cohort. 

That cohort's extra years in work will typically be at above-average levels of pay. The current difference in median salaries for graduates and non-graduates is about £12k per annum: £42k versus £30k. If we conservatively assume that difference generates £2.4k in additional tax from the typical graduate (i.e. at 20%, though many will actually be higher-rate taxpayers), then the 5 years of further education required for a typical degree should recoup a further £12k in revenue if the individual works till 70. At this point you might note that this is significantly less that the £53k cost of tuition fees and maintenance loans for a three-year degree. So how would we bridge the gap of £41k to match costs with income? The answer, once more, is through income tax. The follow-up question is: whose tax? Do we simply raise rates across the board? The answer to that question is no, we raise taxes on that part of the salary distribution where graduates are mostly to be found, which is above £40k.

A graduate tax is cumbersome to administer because it is geared to the persistent person rather than their variable income. The graduate who through career choice or ill-health doesn't earn enough to make repayments means that such a tax would be punitive unless waived below an earnings threshold or written off at the end of a fixed term, which is why the current loan replayement scheme has those features. A far simpler solution is to make income tax more progressive so that those on higher incomes, who will disproprotionately be graduates, pay more. You could do this by lowering the higher rate threshold to a point where it recoups an extra £15.6k over 40 years (that's the difference of £41k but at a 38% rate to match the graduate share of the working population). This would be £47,700 in today's money, which, you'll note, is significantly higher than the median graduate income. One way of implementing that would be to continue with fiscal drag. At 3% inflation, it would take only 2 years for the curent higher rate threhold of £50,270 to depreciate to £47,700.

You could argue that this would penalise successful non-graduates who earn high salaries but who never benefited from higher education, but this is to forget that they will have the option to retire at 65 on a full state pension (worth £60k, i.e. 5 years at £12k per annum in today's money). Also, bear in mind that we're not increasing the burden on basic rate taxpayers, which should please the Chancellor. The difference in tax for a graduate on the median income of £42k would be nil, because they're below the £47.7k threshold. A graduate earning £50,270, i.e. at the current higher rate threshold, would pay an extra £1,028 in income tax a year. Across 40 years, that graduate earning 50k (assuming they stay at the same relative level of income) will pay roughly an extra £41k (in today's money) in income tax. If you add in the extra £12k they can be expected to pay by working till 70, that recoups the £53k spent on their college education. In summary, differential qualifying ages for the state pension, plus an income tax higher rate threshold geared to (but higher than) the median graduate earnings, would allow us to revert to fully-funded tertiary education.

As well as encouraging more students to go to college, and thereby help boost the long-term productivity of the country, putting the burden of student debt onto higher-paid and older graduates (and to an extent on higher-paid non-graduates) has the advantage of going with the demographic flow as the population ages. We are approaching a wave of graduates in their 60s, most of whom incurred no student debts, reflecting the expansion of higher education starting in the 1990s. More broadly, this approach helps redress the bias of the last 40 years that favoured the (now) well-off elderly - who benefited from lower housing costs and better private pensions as well as free education - relative to today's youth. And it does so without penalising poorer older people, who will disproportionately have left school at 16 or 18 and are dependent on the state pension. 

The sketch I've outlined here is simplified and not meant to be definitive, but it does prove, I think, that a fairer and more efficient method of funding higher education is available if we get away from the cursed idea of student loans and view it in terms of working lifetimes and the returns to income arising from higher edcuation. At heart this means reverting to the time-tested principle that today's dependents are paid for by today's workers, whether they be pensioners or schoolkids (no one is proposing student loans for A-levels, after all). The impediments to this are not economic but political, and at their root is both the persistent anti-intellectualism of a public discourse that assumes many degrees are "worthless" and a government culture that prefers universities to operate as commercial enterprises rather than as sites of dissent and crtitique.