It looks like we will have some fun accounting issues with the new system for financing higher education. In particular, around whether it is really a ‘loan’ system as against a ‘graduate tax’, and if it is a ‘loan system’ who are the borrowers and lenders.
It seems that there are some clear underlying changes to the cash flows involved. In particular, many graduates will be paying more cash flows as a consequence of pursuing higher education than is currently the case. Whether these additional cash flows are loan repayments or a graduate tax is debatable. The overall amount of the cash flows is capped by a calculation which treats the payments as if they were loan repayments – so in some ways this looks like a loan. However, for many students the amount they pay will not cover the amounts due as per the calculation because any outstanding amounts, based on the calculation, are written off after thirty years.
Further the amount, if any, which is paid annually is determined by graduates’ income, rather than by the size of the financial obligation which has arisen as a consequence of taking out the loan. And for those earning below the threshold nothing is repayable. Taking these aspects of the scheme into account, the new arrangements look rather like a graduate tax.
Whether the scheme is labelled a loan system or a graduate tax probably matters and seems central to some of the arguments about equity. It is easy to see the argument that it is inequitable to load those from poor background with high levels of personal debt. It is also easy to see the argument that it is fair to move the burden of taxation arising from the provision of higher education away from taxpayers in general towards those, and only those, who earn higher levels of income as a result of higher education.
Would 50,000 have taken to the streets if they accepted this interpretation of the scheme?
If, for the moment, we accept that the scheme is a loan system then it is important who are the borrowers and lenders. If government is truly the lender then it is hard to see how the new system will contribute to savings in terms of overall public expenditure. The cash which previously flowed out of government as tuition fees still flows out from government to universities, but under the new system an increasing proportion is defined as a repayable loan. However, even as a repayable loan, the government’s cash flow needs to be financed and that can only be done as an addition to the fiscal deficit and/or additional borrowing. To get the cash flows off the government’s book they need to be treated as private sector loans made directly to graduates (though presumably with some guarantuees from the state).
It seems to matter then how we account for the cash flows. To increase the chances of the scheme being acceptable to graduates, it is desirable it is described as a graduate tax (and many aspects of the scheme suggest that this would be an appropriate description). To help the government show it is controlling the level of indebtedness and the fiscal deficit the scheme needs to be a private sector loan scheme. I wonder if we have enough creativity to find a way of reconciling these two views.
Here’s my first attempt! How about we think of the scheme at two levels – firstly in relation to cohorts of students – say the cohort of 2012 and secondly at the level of individual students. So overall the private sector (maybe via a consortium of some sort) lends money directly to the cohort by making payments on behalf of the cohort directly to universities to pay for tuition (and other) fees. At the level of the cohort as a whole we could recognize and monitor the level of debt associated with the particular group of students who make up the relevant cohort.
There would not however be the need to recognize the individual level of debt other than to provide an upper cap to the amount of contributions which individual students would make. Individual graduate members of the cohort would then make their individual contributions to some collective body which represented the cohort as a whole (maybe some not for profit organization underwritten by government). This body would in turn make repayments directly to the private sector lender(s) on behalf of the cohort of students.
There would be a need to establish the legal status of the underlying obligations that fall on individual graduates; these would require payments to be made by individuals to the collective body representing the cohort as a whole (maybe students would have to enter into some legal contract with this collective body when they enter higher education).
My proposal would have the benefit of providing arguments for keeping the expenditure off the governments’ books and, by separating individual students from personalized debt, would make it easier to argue that the scheme is in effect a graduate tax (albeit one with an upper limit to the level of taxation).
Martin Pliener is senior lecturer in business management at York St John Business School, York St John University
