A profitable alignment of interests

Johnny Rich on a simple change that could erase student debt, fund universities and boost employability - without costing taxpayers more

March 27, 2014

Source: Eduardo Fuentes

What if a simple change to student funding could do away with student debt, give universities secure long-term funding and improve graduate employability in one fell swoop – all without costing the taxpayer more?

It sounds too good to be true, but bear with me. With the cap on student numbers soon to be lifted, the sustainability of the current system is cast into the spotlight. We have to ask: is there a better way of doing things?

My modest proposal is in two parts. First, rather than having a graduate tax in all but name, repaid alongside the employee contribution to National Insurance, why not simply move the payment across to the employer contribution? In other words, do away with fees altogether and pay for higher education teaching through a tax on employing graduates, rather than on being one.

Whoosh. Student debt disappears (or most of it). It was not a real debt anyway as what graduates end up paying has only a nodding relationship to what they “owe”.

The idea of a tax on employing graduates may seem odd when some 900,000 young people in the country are unemployed, but in fact that is exactly why it makes sense. The tax is an illusion but the realignment of interests is critical.

Employers might grizzle about another so-called tax on jobs, but actually their wage bill for the same staff need not change. Under the current system, a graduate might get a £25,000 salary, of which £360 goes to pay off their debts of £50,000. If offered £24,640 with no debts to pay (but with their employer making the £360 payment instead), I know most graduates would choose to be debt-free. They might earn less in gross terms, but their disposable income does not change and nor does the cost of employing them.

Businesses could of course cut costs by shifting to employing non-graduates, but that is nothing new and, as last August’s report, University Degrees: impact on lifecycle of earnings, by the Department for Business, Innovation and Skills showed, the demand for graduates is not slacking as numbers grow. Employers are always willing to pay more for staff who will add more value than they cost.

There’s the rub. Employers sometimes maintain that students have not studied the right subjects, that they have not acquired the right skills and that they are not able to be productive from day one.

That is why the second part of the solution is needed to create a better connection between demand and supply in the labour market: namely, that the “taxes” should be paid to the institution where the graduate studied.

The government’s current approach is to put students “at the heart of the system”, with universities running whatever courses they can fill. It is all “push” by the labour supply and no “pull” of employer demand.

But sadly, students’ desires are all too often ill-advised. Take forensic science. Because CSI is good television, there are currently about 8,500 students studying the subject. The entire UK forensic science sector employs no more than 9,000 people, most of whom aren’t near retirement. The supply is growing even as the market shrinks.

Yes, they will get other jobs, but not the one they were made to believe they could get and for which they are best prepared.

A university whose financial security depended on it would try to avoid oversupplying narrowly skilled graduates and instead ensure that, whatever its students studied, they graduated job-ready and self-reflective regarding their abilities. Forensic science would be rare and hard to get into, while engineering would be ripe for wider participation.

But, I hear you cry, our universities should not be turned into corporate conveyor belts. I couldn’t agree more – and they wouldn’t be. Most employers do not have a preference for vocational degrees. Most – even media companies – would rather employ a well-rounded philosophy graduate than a media studies one any day. Vocational courses might be OK at preparing somebody for the first five years of a career, but wise universities will hedge their bets for the medium to long term by creating a balance of graduates.

Nor would this arrangement threaten the humanities, whose graduates typically earn less than those with science degrees. Humanities courses are cheaper to run, so a university’s returns may be greater by offering them if they’re the ones that attract goodquality students.

There are, of course, devilish details. For example, arrangements would be needed to fund universities during the move to the new system. State subsidy would still be required for subjects such as nursing that are costly to run, whose graduates don’t earn much, but which the public interest demands.

Such issues, however, are small by comparison with the many benefits that emerge spontaneously from aligning the interests of students, universities, employers and wider society.

The current system sees the government trying to goad universities into competition from the sidelines, like a dad at a school football match. Ultimately, it isn’t going to get any goals scored. The government’s job is to set the rules of the game so that market forces keep the players working as a team because it is in their own – and their shared – interests.

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